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Standing Committee on Economics
04/09/2020
Australia's four major banks and other financial institutions: four major banks

COHEN, Mr David, Deputy Chief Executive Officer, Commonwealth Bank Group

COMYN, Mr Matt, Chief Executive Officer, Commonwealth Bank Group

Evidence was taken via teleconference—

CHAIR: I resume the hearing of the House of Representatives Standing Committee on Economics into the major banks and financial institutions. We have representatives from the Commonwealth Bank of Australia present for today's hearings. I remind you that although the committee does not require you to give evidence under oath the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I now invite you to make an opening statement.

Mr Comyn : Good afternoon, everyone. Since we last spoke to the committee almost a year ago, a lot has changed. Australians have faced extreme challenges on numerous fronts: prolonged drought, the most devastating bushfire season in living memory and now the coronavirus pandemic. These multiple challenges have put extraordinary pressure on Australians, requiring us to be resourceful and resilient, and to come together as a community.

Earlier this year, we realised the community would look to our sector for support on a scale we've not seen in decades. It's been essential that our customers, both personal and business, have been able to rely on us when they needed us most. We've been able to respond quickly and flexibly through the collective efforts of government, regulators and the industry with tens of billions of dollars of support to help keep people in work, businesses operating, and families and individuals in their homes.

Our people have also been central to our response. I've been extremely proud of the way our frontline staff have gone above and beyond to support our customers and communities even as some were in difficult circumstances themselves. We've kept the majority of our branches open through the pandemic, while also redeploying around 500 of our branch staff to our financial assistance solutions team to ensure that we could respond to customers in the way in which they preferred to engage with us.

We've received over one million requests for assistance and support. We've offered deferrals on 250,000 loans, relating to over $60 billion in loan balances. At the peak, this included deferrals on 154,000 home loans; 86,000 small and medium business loans; and 21,000 personal loans.

Following the announcement of the government's SME guarantee scheme, we deployed an improved lending process for new and existing business customers. We began accepting applications the day after the government had established the scheme. We've now approved $830 million in loans which accounts for around half of the scheme loans funded.

Through this time we've also leveraged our digital channels, which managed 10.2 million peak daily logins. Using our mobile banking app, we sent over 250 million personalised messages to our customers. Some of these messages pointed to an online financial support guide, a regularly updated source of information on CBA's services and government assistance. The guide has had more than 5½ million visits from both our customers and from the wider community.

In our app, we also added a coronavirus money plan feature, giving our customers simple and actionable guidance on managing their finances. This feature complements our existing benefits finder functionality, which is a service that helps customers more easily find and access payments they may not have realised they were eligible for. Customers have unlocked benefits of more than $150 million.

Statistics give a sense of scale but the stories of difficulties facing many Australian families are more compelling. Mal and Sue Rixon are on acreage outside Mogo on the New South Wales South Coast and operate the local school bus. Fire passed through the Rixon's property on New Year's Eve, bringing significant damage. We activated our support package and paused repayments and, with their hardship payment, the Rixons were able to take the first steps to re-establishing their business. Similarly, a furniture retailer at Devonport in Tasmania had to close its doors during the COVID outbreak and apply to us for a loan under the government guarantee scheme, to allow for payment of staff and expenses. Upon receiving their loan and advertising their reopening in April, their business has seen sales increase 100 per cent on the previous year due to the increased demand for homewares. They went on to employ 12 staff—up from nine before the pandemic.

Australia's health and economic outcomes are among the best in the world. This is testament to the efforts of our healthcare workers, federal and state governments, regulators, business and the broader community. We see this as a source of optimism about what more can be achieved. Nonetheless, considerable challenges remain. Our central economic forecast aligns with that of the Reserve Bank, which sees the economy contracting by four per cent in 2020 before expanding by two per cent in 2021, with unemployment reaching somewhere between nine and 10 per cent.

The size of the economic contraction is less severe than we first anticipated, but we face a long and uneven recovery. As we approach the end of the initial deferral periods, we are working hard to help our customers assess their options. By the end of September, we will have made calls to around 250,000 customers over a two-month period. Many of those we contact will be able to recommence their repayments; some are facing more difficult circumstances. At the Commonwealth Bank, we are well prepared to support our customers through a wide range of economic circumstances, and we have approximately $5 billion of surplus capital. Nonetheless, our resources are finite, which is why we must concentrate our support where it is needed most.

We see the task of finding new employment opportunities as one of the country's highest priorities. Deferrals and other support measures have played a vital role, but new jobs will be essential for a sustainable recovery. So it is vital our lending supports investment and job creation. Many Australians are looking for the path back to normality so they can return to their lives. We will do what we can to help them get there.

In concluding, I want to highlight that, from our perspective, this year has been characterised by a high degree of positive cooperation between industry, government at all levels and the community. This has been immensely valuable. We want to preserve this constructive approach which maximises Australia's chances of recovering strongly from the challenges we all face. Thank you.

CHAIR: Thank you, Mr Comyn. You obviously complete research on the state of the economy. Where does the CBA see its position and the general health of the economy in the next financial year?

Mr Comyn : Overall, our economics team's forecast is very closely aligned to the Reserve Bank's forecast. As per my opening statement, we expect GDP contraction over the course of this calendar year to be just over four per cent, or 4.25 per cent. We think that during the course of the next calendar year, GDP will increase by about 1.75 per cent. One of the key measures that, of course, we look at very closely is unemployment. We expect that unemployment will peak somewhere between nine and 10 per cent in the December quarter depending on the participation rate. As part of that, clearly, I think one of the biggest challenges for Australia in 2021 and beyond will be how effectively we can move from the substantial, and, I think, very effective, income support that's been in place to one of fiscal stimulus generating aggregate demand and new jobs in the economy. The persistence of that high unemployment rate is going to be one of the key economic indicators.

CHAIR: You have the biggest loan book in terms of household mortgages in the country. What's the stress testing showing about what is going to happen to property prices, acknowledging there are different parts of the market in different capital cities and even inside states? What drop are you expecting and when do you expect to hit bottom?

Mr Comyn : Our central scenario obviously planned for an improved, or more optimistic, and a more-significant downturn. But our central or base case scenario would see house prices falling somewhere in the order of 10 to 12 per cent. I say that, clearly acknowledging, as you mentioned, there are a lot of different parts of the market. Broadly, regional areas at the moment are performing better than metropolitan areas. We see less downward pressure on houses versus apartments, particularly inner-city apartments. I'd say, overall, our experience has been that the housing market has been more robust than when we first put forward those forecasts, originally back in May. If anything, housing volumes year-to-date both in this month as well as in July have been strong. The housing market, at least to date, has really only drifted downwards slightly. We have seen the Sydney market up in the 12 months to the end of July by 12 per cent. The Victorian market was up in the 12 months to 31 July by about 9½ per cent. So a fall of somewhere in the order of 10 to 12 per cent given where the housing market is and how strong it has performed in recent times, we would think, is entirely manageable.

CHAIR: How many people are you expecting not to be able to pay their mortgages and default?

Mr Comyn : There's a very important period that we're going through at the moment. That, essentially, is contacting all of our customers that are in repayment deferrals. I mentioned in my opening statement that we will be making approximately 250,000 calls over August and September and into early October. That complements a whole range of other personalised messages in app. We'll have a better sense at the end of that period. We would expect and hope that the majority of customers will be able to recommence their repayments, but, clearly, not everyone would be able to do so. There's a range of different options that we will work through with our customers on a case-by-case basis to establish what the right solution for them is. Of course, it is contingent upon the broader health outcomes in the economy—what else is happening in terms of containment or lockdown measures and the broader employment market, which we won't have a particularly good sense of until probably early into 2021.

CHAIR: But you must be scenario planning. Is that correct?

Mr Comyn : Yes. As a financial institution both from scenario planning and from an accounting standard perspective, we're required to contemplate future credit losses from the pandemic, which we did in our third-quarter results. That saw us increase loan loss provisions by $1½ billion. So we're holding a total of $6.4 billion for future credit losses.

CHAIR: Do you think that's the worst case scenario for you?

Mr Comyn : Based on that scenario—and there's a lot of work which I can expand on to the extent you're interested on how you establish those loan loss provisions—it's both the top-down multiple economic scenarios and a bottom-up as we go through each of both our retail exposures and non-retail exposures and contemplate how they might perform under different scenarios. We make adjustments towards that or the likelihood of customers being able to pay our losses at default, for example. That's what drives those central estimates.

CHAIR: How often do you review it?

Mr Comyn : Every month. We report on a quarterly basis to the market.

CHAIR: Going off from principal place of residence, what is the projection of CBA related to investor properties, particularly around what may happen with rents and therefore people's capacity to be able to finance debt for the purchase of investor properties, which are principally interest only?

Mr Comyn : Specifically?

CHAIR: Across the board but including ones that are principal interest and interest only.

Mr Comyn : Sorry, we lost you momentarily there. Would you be able to repeat that?

CHAIR: What's the CBA's projections around investor loans for property, particularly in an environment of reduced rental income? Is that going to have a material impact on people's capacity to be able to finance that debt?

Mr Comyn : Broadly, what we've seen—notwithstanding, as I said, more robustness in the housing market than certainly we'd anticipated several months ago—is that investment lending has fallen to the lowest now, I think, since 2004. So there's clearly less demand for new investment loans. As you said, this is particularly seen in parts of the market. If we look at particularly inner-city apartments—Sydney, Melbourne and Brisbane—there's pressure on rental yields, which eventually will flow through into prices. In the context of how we think about valuations, that would be one area where we think there would be less support than perhaps in other pockets. We're seeing some very divergent outcomes and results in different parts of the housing market both regionally and across dwellings.

CHAIR: Again, have you stress tested what you think is a likely scenario around the number of investors who won't be able to finance their debt because of reduced rental income?

Mr Comyn : We have, but we do both an analytical exercise—and we produce some of those results in our full-year results in August—and supplement that with practical experience with our customers as well. So it's hard to sit here today to tell you exactly what proportion of customers we think are going to have difficulty. Clearly, their circumstances are going to vary tremendously. I think about 28 per cent of our deferral loans are investment home loans. That's slightly less than the overall portfolio. Clearly, there are a range of different options. If you've got an investment property, you're far more likely to be willing to sell it than your principal place of residence. From our perspective as a financial institution, we're going to do everything we can to keep you in the home in which you live. But clearly there are some options for customers who may be in financial difficulty who have an investment property. The market currently hasn't deteriorated much, so it would be sensible for some customers to be contemplating around whether now might be an opportune time to reduce some of that outstanding debt.

CHAIR: What measures have the CBA taken for people who've had challenges with credit card debt as a consequence of loss of employment or reduced income throughout the COVID-19 pandemic?

Mr Comyn : A combination of measures from repayment deferrals, but far fewer in number on repayment deferrals for credit cards because they're a very different style of product. Of course, it's a revolving debt facility. A much larger number of customers were in what we would consider to be general hardship, which includes repayment deferrals but also includes a broader range of different outcomes as well.

CHAIR: But, in terms of actual measures you've taken, if somebody has come to the bank and said, 'I have a problem with credit card debt because I have lost my job,' or, 'I have gone from being employed on this salary now to JobKeeper,' have there been clear pathways available to people? What volume of people have come to the bank and raised those issues and have had assistance provided either to move into a different product to manage their debt or to freeze the debt, which is, for instance, what happened in the case of Westpac—they provided pathways for doing so?

Mr Comyn : A combination of things. Particularly during the period of March, April and May, we took steps for customers who hadn't made their minimum repayment. We didn't charge them any interest in the future period. We made sure they weren't penalised for that. In terms of the context of customers who would be on repayment deferrals or who had been on repayment deferrals, that number would be in the thousands. For customers who had gone into financial hardship support, which includes deferrals and a range of other options that you're alluding to, that number would be in the tens of thousands. I couldn't give you the specific number, but I'd be able to.

CHAIR: Could you get us the specific numbers on notice?

Mr Comyn : Sure.

Mr Cohen : If it helps, Chair, to give you an order of magnitude: there are about 20,000 credit card customers who went into a hardship solution as a result of impacts of COVID. Just prior to that, we had around about 14,000 credit card customers who took up a hardship solution because they were facing difficulty immediately before the COVID pandemic struck.

CHAIR: Alright. I look forward to getting that data. Thank you; that's useful. Banks are obviously going to be a critical part of economic recovery, particularly around SME lending and SME facilities that you have available and backed up by the government. Why is it that you chose to defer the loans of your small business customers on an opt-out basis at the start of the pandemic?

Mr Comyn : Firstly, that was prior to the announcement of JobKeeper. But, in effect, what we were trying to do was make sure that we could reach as many customers as possible and put them in a position such that they could have their repayment deferred from their April repayment, and then, of course, we contacted all of those customers to let them know what we had done, and it made it easy for them to opt back out of that.

CHAIR: In terms of the volume of SME lending under the facility, how many SME customers have actually onboarded recently?

Mr Comyn : From the SME loan guarantee scheme—

CHAIR: Yes.

Mr Comyn : or repayments?

CHAIR: Guarantees.

Mr Comyn : There was $850 million of lending, which is about 50 per cent. I think the average loan size, because it's mostly working capital—many of the customers that we funded were wanting to participate in JobKeeper and needed the funds to be able to pay their employees—was about $85,000. Again, I don't have the specifics, but it will be in that order.

CHAIR: Sorry, say that again.

Mr Comyn : $850 million. The average loan size was $85,000. I know we messaged about 250,000 customers to let them know about the SME loan guarantee scheme. We had approximately 750 people working over the Anzac Day weekend fulfilling requests for customers. So it's certainly in the tens of thousands.

CHAIR: How many have applied versus the number that have been approved?

Mr Comyn : I'd have to get you the exact numbers. Overall, I think the decisioning rate was reasonably high and, I'd say, appropriate given the circumstances. The rate is quite low—it's about 4½ per cent. There certainly would have been some customers that were declined, but, given the circumstances in March and April and the need for customers to be able to pay their employees and then be able to participate in JobKeeper, we certainly tried to facilitate as many of those as we could.

CHAIR: How does what happened in, say, the past 12 months compare to historical trends? Has there been an increase in the amount of capital that's become available for SME lending and the number of approvals? Is it up or down? Is it consistent?

Mr Comyn : For SMEs, we've done about $9.2 billion of lending since March. That's the number for April to July. The last quarter of the last financial year was the strongest SME loan growth that we'd seen in two years. Notwithstanding a lower appetite, compared to what we'd been doing in previous periods, it was actually a stronger period of loan growth for us, specifically for SMEs.

CHAIR: We had ANZ this morning, and they made the point that up until the start of this year they were actually going down and now they've increased the amount of capital they've got available for SME lending. Yours has been consistently growing?

Mr Comyn : We've certainly been trying to grow our SME lending exposure. Pre-COVID, that was an area of strategic focus for us.

CHAIR: Trying to grow or have grown?

Mr Comyn : Both. We would have liked to grow it faster. It's still been low-single-digit credit growth in SME business lending for some time, and clearly the context has changed quite markedly over the last few months.

CHAIR: Has the bank's risk appetite for SME lending changed in the recent months, or has it been making the same wage assessments?

Mr Comyn : It's a very challenging environment. It's certainly changed, but we're very cognisant of trying to support customers, making sure that we're helping them get through such a challenging time and, potentially, hopefully, helping them invest in their business for the future. But it would be fair to say that a number of different elements of our overall lending approach, both in supporting existing customers and for new customers, has changed, given the risks in the economy.

CHAIR: We asked ANZ about the issues around insolvency. It's obviously and self-evidently an issue for us, as the parliament and the government, and for you. How is the bank preparing for insolvency? Have you set up a task force to identify different businesses who have borrowed and who may be in a situation where they may be teetering or need assistance? How are you doing that on a practical level?

Mr Comyn : In a number of different ways. It's clearly an area of important focus for the government and some of the support that's been put in place, and potentially it's an area for medium- and longer-term reform. From our perspective, whilst the volumes at the moment are extremely low, given the level of income support that's available within the economy, we've certainly had time to think through and plan for what, unfortunately, may be an increase in insolvency. We have a dedicated team set up in our group credit restructuring area, which is typically dealing with businesses that are going into administration.

CHAIR: But that was pre-existing?

Mr Comyn : Yes, it was, but we've also added additional resources, to varying degrees. In our retail business, it's about 750 people—smaller numbers in our corporate restructuring area, which is generally dealing with business insolvencies. We're very cognisant of this as an area that has caused challenges for both the institution and our customers. We've tried to learn from mistakes of the past. I think it's an area where we are extremely focused on the process and on making sure that we communicate and work very clearly and closely with customers.

CHAIR: When you say 'extra resources', do you mean extra people? Is there more regularised risk reporting to you and to the board, or is it just business as usual?

Mr Comyn : It's extra resourcing and then there's regular reporting. There was regular reporting pre COVID, but it's fair to say that the depth, breadth and frequency of that reporting has increased since that time. Like I said, at the moment the workload particularly in that area is not high given the substantial income support, but we go through that very frequently as a leadership team. Every time the board meets through the risk and compliance committee, they will get an update, generally on financial risks, which of course a huge proportion is credit risks sector by sector—what we're seeing and what problems we anticipate in the future.

CHAIR: Going straight to the point—I raised this with Mr Elliott from the ANZ as well—has there been anything identified where Victoria is different from the rest of the country at this point as a result of the lockdown measures for either mortgages or SME lending? Also, have you identified anything in terms of hotspots and locations in any specific part of Victoria as a consequence of COVID-19 and its impact?

Mr Comyn : We've certainly seen an increase in both requests for assistance and repayment deferrals since the lockdown recommenced in Victoria. Broadly, the trajectory nationally reduced the number of customers that were on repayment deferrals. There was an increase of approximately 100 to 120 per day during the early stages of the lockdown. I think that has reduced somewhat. Clearly we can see, in some of our spend data across debit and credit spend, a reduction: a clear difference in terms of underlying consumer expenditure in Victoria versus many other states. We anticipate future support and more difficulties for small businesses in Victoria, particularly in some of the metropolitan and inner-city areas, where there's clearly a large degree of uncertainty about their future. We've also seen as a by-product a flow through into other states, broadly into consumer and business confidence. I think the setback in Victoria has certainly weighed on the overall national economy as well.

CHAIR: Going back to the question I asked before about insolvency: you said that there were extra resources, essentially, dedicated to that team. What dollar figure are we talking about?

Mr Comyn : Specifically in terms of business insolvency?

CHAIR: Yes.

Mr Comyn : I couldn't give you the specifics. It would be small. It's a relatively small team in the context of our operation. We've got more than a thousand dealing with customers who need financial assistance in home lending. It would be much, much smaller than that in our business and corporate teams.

CHAIR: Would you say it's a 10 or 20 per cent increase in the resources?

Mr Comyn : It would be somewhere in that order.

CHAIR: Somewhere between 10 and 20 per cent?

Mr Comyn : Yes. But from a relatively small team to start with. I'd be happy to get you the exact numbers.

CHAIR: That would be good. Going on to the issues around corporate culture, because this is obviously one of the things that you should have been able to focus on despite us not being able to pass legislation on the royal commission: culture remains an issue for many financial institutions including, obviously, what has come to light recently about QBE and AMP. Does CBA have any nondisclosure agreements related to issues of staff and allegations such as sexual harassment or equivalent issues of HR?

Mr Comyn : None that I'm aware of.

CHAIR: In an organisation the size of CBA? That's interesting.

Mr Comyn : None that I'm aware of, Mr Wilson.

CHAIR: But you could give me a commitment that you could find out and come back?

Mr FALINSKI: Just on that: what steps do you take to inform yourself of that, Mr Comyn?

Mr Comyn : Of which, Mr Falinski? Of nondisclosure agreements?

Mr FALINSKI: Sexual harassment issues in your organisation. You have a positive culture of informing—

Mr Comyn : Absolutely. There are a variety of mechanisms inside the organisation where, of course, there's zero tolerance for that. There's regular training across the organisation and for leaders about how to identify different options for people if they would like to report that. They can go through both formal channels inside the organisation and our dedicated—what we call the SpeakUP hotline. That reporting aggregates through into a range of different forums. Ultimately, some aspects of that go all the way through to the board.

CHAIR: Earlier this morning we heard from Mr Elliott around responsible lending laws. He made the point that he didn't think laws were a problem. He agreed with the Reserve Bank governor around some of the criticisms of guidance notes, but believed that they were broadly being corrected. Is that your view or do you think that there are still significant problems around the law or guidance notes? Do you agree with the Governor of the Reserve Bank, do you agree with Mr Elliott or do you have a completely different view?

Mr Comyn : I'm very aware of the governor's views in particular. As you would imagine, this has been a topic of conversation between institutions, the regulator and the Council of Financial Regulators. I think there are a number of ways to look at it overall. First of all, regulators have been asked and have sought to clarify and provide additional guidance about what's required for institutions to undertake responsible lending. That has increased the workload on financial institutions in the assessment of loans. We've invested tens of millions of dollars to make sure that we can turn around, in this case, our home-lending decision times within a couple of days. It has enabled us to grow above system. We lent more than $100 billion last financial year to housing. In my view there is an abundant supply of credit available for housing but it is harder for a customer in terms of the process to get a loan. The time that that takes varies across institutions. I think it's less about the supply of credit and more about the process. The guidance from our perspective is clear. We understand the guidance. It's a separate discussion around—

CHAIR: Mr Elliott said there was a lot of grey in it. You're saying it's more black and white?

Mr Comyn : We certainly feel confident about the interpretation of the guidance that's there. We've engaged, as have other institutions, fulsomely with ASIC. It has been clarified. It is much more comprehensive and robust than it had been in the past. If you went through the responsible lending guidance across RG 209, APG 223 from APRA and various representations from, let's say, AFCA around how they'll think about responsible lending, there is very extensive documentation, but we have operationalised our processes and systems around that. Banks are far less able to rely on what customers are telling you in loan applications than they were in the past. Essentially, a lot more work now goes into, particularly, expense verification and liability verification. That takes time. For institutions that haven't automated those processes, it takes them a significant amount of time, which is why some of the speeds of decision at some other institutions have blown out extensively, which is causing frustration across both customers and particularly property developers.

CHAIR: Isn't this fundamentally a problem? You're a larger bank. You've got more sophisticated systems. More burdensome regulation actually puts you at a competitive advantage.

Mr Comyn : We've certainly invested in response to operationalising and trying to automate as many of those processes as possible. That certainly has been helpful in the current context.

CHAIR: I know you'll be excited: you've got a whole bunch of questions on notice that apparently have been distributed to you in the past 24 hours on this, to try and expand on what the impact of responsible lending is on the provision of loans. There has been a drift, if I understand correctly, on mortgages picked up by the CBA in this time over the past few months in comparison—it already had a very strong loan book, but it has become even stronger, if I'm not mistaken. How much has it grown by?

Mr Comyn : We grew at 1.3 times system—about 4½ per cent annual balance growth. The market was growing slightly below four per cent. As I said, our gross loans during the last financial year were $100 billion. Our mortgage book in total would be almost $500 billion. It's clearly a substantial part of our business.

CHAIR: In the past 12 months it has grown 4½ per cent?

Mr Comyn : Yes.

CHAIR: I have more questions, but I can't be greedy. I'll hand it over to the deputy chair.

Dr LEIGH: Thank you, Chair—the theme of the royal commission indeed! Mr Comyn, thank you very much for appearing before us today. In relation to SME guarantee loans, this committee put questions on notice at the end of May, early June about the number of applications and the number of approvals. For ANZ, the approval rate was 66 per cent; NAB, 87 per cent; Westpac, 78 per cent; and CBA, 34 per cent. Why had you approved such a small share of those SME guarantee loans at that stage compared to the other major banks?

Mr Comyn : Dr Leigh, I think the most likely explanation would be that we offered it to far more customers, given the fact that we ended up approving and funding more than $800 million, which represented I think over 50 per cent of the total SME loans. We deliberately tried to offer the product broadly. We set up a dedicated and expedited decisioning process. We wanted to make sure, particularly for smaller businesses, that they could pay their employees and participate in JobKeeper.

Dr LEIGH: Do you expect the approval rate to increase? Do you know what it is now?

Mr Comyn : I don't specifically know off the top of my head, no. I think it was lower when the scheme was first announced. I think some of that came from the fact that some customers had thought, perhaps, it was more likely a grant than a facility that needs to be repaid. I know that the approval rate increased from that time. As you would appreciate, we're now focusing some of that effort as well onto both the second phase of the SME loan guarantee, which increases the loan size from $250,000 to $1 million and means that on 1 October the majority of the demand for the SME loan guarantee scheme, at least from our perspective, representing half of the total loans, was early in the overall process—let's say April and May, in particular, were the peak periods.

Dr LEIGH: There was a report conducted recently by the Banking Code Compliance Committee, which reported the number of breaches per billion dollars of household deposits. It lists the major banks as major bank 1, 2, 3 and 4 in its chart No. 1. Which is the Commonwealth Bank?

Mr Comyn : I don't have it in front of me, but if it's the first exhibit I think we are major bank No. 2.

Dr LEIGH: That would mean that your breaches are the second worst of the four majors.

Mr Comyn : Clearly, no institution wants to be breaching an industry code. There are a couple of things that I'd add. Firstly, at least as we understand it and it has been explained to us by the committee, there are some differences in the way institutions report breaches or incidents. The majority of our breaches for example, which doesn't excuse them, come from our call monitoring. We take about 15 million calls every year. If, for example, one of our agents is talking to a customer and doesn't read out word for word exactly every script, including the call monitoring script, repeating it for the second customer, every word in any of the descriptions, we will breach, potentially, multiple times on a single call. It's a significant area of focus for us. But, as I said, we would clearly like the total number of breaches to be much lower than they currently are. I don't know if you want to add anything to that?

Mr Cohen : I'd just add that we have taken a very robust approach to reporting, as Matt says. Just to give you an example of that, we have made a specific effort to ensure that if we report a breach in relation to one particular section of the code—for example, vulnerable customers—we consider that's also going to be a breach of the section of the code that requires banks to deal with customers in an ethical, fair and reasonable manner. So we'll get multiple breaches out of a single incident. We've been quite robust in that approach. We've had discussions with the BCCC, where the BCCC has acknowledged that we're probably at the forefront of the approach the banks are taking to compliance. I think that's consistent with our approach to non-financial risk generally, where we are seeking to be far more thorough and hold ourselves to a much higher account around identifying breaches and reporting them. From our perspective—although, as you point out, as major bank No. 2 on that chart 1 we are the second highest, and it looks like we are offending more—the commentary from the BCCC, both in the public report and in the report that we've received from the BCCC, is very much more around the culture of identification and the awareness of breaches, not just looking at matters that are in legislational regulation but matters that go to our policy. For example, we'll report to the BCCC a breach of our own internal policy, which is probably going beyond what others do.

Dr LEIGH: You're not 'tempering your sense of justice,' then. Can I take you to the issue of superannuation early release. In the Sydney Morning Herald on 22 August an unnamed CBA spokesman is quoted as saying, in relation to the superannuation early release scheme:

If a customer accessed the funds knowing that they would not meet the Australian Tax Office’s eligibility criteria we will generally decline the loan.

Is that still CBA's position?

Mr Cohen : Dr Leigh the way that we approach the early release is that we will receive from the ATO a file of customers who have requested and who have satisfied the ATO's requirements or accessibility to the early release scheme. Once we receive that file, we will then process it, unless there are suspicious circumstances. If there are suspicious circumstances—

Dr LEIGH: I think you may be misunderstanding my question. This is in relation to home loan applications.

Mr Cohen : Sorry. In relation to home loan applications, we don't track the release of the early access to superannuation into bank accounts and then into loan applications. What we do as a matter of course, however, as we assess loan applications is look at the customer's ability to pay the loan. We look for a regular source of flow into accounts. We don't necessarily and we can't always go to the nth degree of ascertaining exactly what the source of funds are, but we're looking for a regular pattern of flow into accounts, for example, to establish the deposit but also to enable the servicing of the loan. But we can't always ascertain exactly—

Dr LEIGH: But you're—

Mr Comyn : Are you asking whether we take into account early access to super in our home-lending application process?

Dr LEIGH: Well, The Sydney Morning Herald said:

The Commonwealth Bank has instructed lenders and brokers to ask applicants if their financial circumstances have changed as a result of the coronavirus pandemic, which could include questions over whether they were eligible to access up to $20,000 of their superannuation.

The article then went on to quote your spokesman, saying:

"If a customer accessed the funds knowing that they would not meet the Australian Tax Office's eligibility criteria—

and we know that four out of 10 people had no drop in income before they accessed super early release—

we will generally decline the loan."

Mr Comyn : There are a couple of things there. As you know, there have been provisions in place for some time for people to access their superannuation. Generally, during the assessment of a home loan, even though we would not be looking specifically at superannuation, we would be keen to understand people's personal circumstances, including whether they were experiencing hardship or a change in their income. We want to understand that on the basis of whether they are receiving government support as part of the change in that income or not. So certainly we stand by that statement.

Dr LEIGH: It sounds as though you're not standing by anything that was in the article, then. I appreciate your description of the process, but it's different from the question I'm asking. Let's move on. I want to take you to the question of dividends. APRA instructed ADIs at the start of the year to retain at least half their earnings. Of the majors, CBA flew closest to the wind. I understand your dividend payout rate was something in the order of 49 per cent. Is that right?

Mr Comyn : Yes, that's right.

Dr LEIGH: What made you feel that it was appropriate to pay back such a significant dividend given the uncertainty about the economy and also given the significant taxpayer support that was being provided?

Mr Comyn : There are a number of different factors that we would take into account. First and foremost is the overall position and particularly capital position of the Commonwealth Bank. We were fortunate to come into this pandemic in a position of strength insofar as our capital ratio. We finished our financial year at a common equity tier 1 of 11.6 per cent. APRA's unquestionably strong capital ratio is 10½ per cent. That surplus is worth more than $5 billion.

Secondly, as you would appreciate, we also have to think through the requirements for our retail shareholders in particular. We have one of the largest retail Australian domestic shareholder bases in the country. The major banks represented last calendar year approximately 32 per cent of dividends. We were acutely aware that we were in the financial position to make a dividend distribution to 890,000 Australian families and households who own our shares directly. On balance, between being able to support the economy, lending as part of that recovery, making sure that we have prudent and excess levels of capital, engaging with the regulator and contemplating a range of different stress test scenarios, and bearing in mind our shareholder base, the board made the decision to pay a fully franked dividend of 98c.

Dr LEIGH: We've currently got a cash rate of 0.25 per cent, but you're still offering credit cards which charge interest rates of more than 20 per cent. Given how low the cash rate is, do you think it's appropriate to have credit cards that charge more than 20 per cent interest?

Mr Comyn : There are a range of credit cards that we offer. The low-rate card is below10 per cent, at 9½ per cent. We have an instalment feature on that. As you mentioned, there are credit cards offered by us that have a higher interest rate than that. I understand the question, and credit cards, in terms of the cash rate or the cost of funding, represent slightly less than 20 per cent of the overall cost base that goes into that lending product. It's a very different product to a secured home loan. We're very cognisant of that. In terms of the overall pricing, we have made a number of changes to our credit card portfolio over an extended period of time.

Dr LEIGH: Have you taken any steps to shift customers from the high-rate credit cards into the lower rate ones that you're talking about?

Mr Comyn : We have, over an extended period of time. And obviously the vast majority of customers who have outstanding balances would be on the lower rate cards, as opposed to the reward or premium cards. The banks in Australia saw, as did banks globally, a substantial reduction in credit card balances, particularly in our fourth quarter—the April to June period. It was a 20 per cent reduction in our credit card balances, which is almost $2 billion. That is quite a substantial reduction, certainly much more substantial than we've seen previously.

Dr LEIGH: Do you offer credit card insurance, a product often described as 'junk credit card insurance'?

Mr Comyn : No, we do not.

Dr LEIGH: I asked you at the last hearing about the way in which you report the costs of international transactions, and the fact that at the moment your website still offers a flat fee and a formula through which you calculate the exchange rate spread, but not the simple, transparent pricing you'd get from a provider like TransferWise. They would say, 'If you want to move $1,000 overseas, it will cost you $27.' You undertook to provide me with more information, but none of that information went to the transparency of fees and the full fee transparency that's provided by others. Given that these fees are often paid by pretty vulnerable Australians—think about taxi drivers working extra shifts in order to send some money back to Fiji—could you undertake to move to full fee transparency?

Mr Comyn : I'd need to first make sure I completely understand what you mean by full fee transparency, but I have no objection to transparency in this particular area. I don't have the information in front of me that we provided for you, but I'm happy to follow that up. I know that we have reduced by, I think, two percentage points some of the foreign exchange fees that go out specifically to the Pacific islands—you mentioned Fiji. We're conscious this has been an area where we've certainly tried to provide greater transparency. There have been a number of different fee reductions and changes to make sure that our rates are competitive. As you probably appreciate, the volumes at the moment around foreign exchange and notes is greatly reduced.

Dr LEIGH: Full fee transparency is not hard. It just says: if I want to move $1,000, what's the total cost? That's flat fees plus exchange-rate spread. Surely you could provide that?

Mr Comyn : I'm very happy to take that on notice. If we can't, I would need a good reason to explain why we can't. I suspect it may have something to do with the arrangements that might be at the other end with the correspondent bank or wherever we're sending it to, unless we can't accurately estimate what those fees and charges might be. But I'm happy to look into it, as I said.

Dr LEIGH: I'd buy that if others weren't providing full fee transparency. But when you've got other non-bank providers providing full fee transparency, it suggests to me that the reason that the major banks don't is because they're benefiting from confusion in this space—specifically, from customers' confusion over the exchange rate spread.

The worst stories I've heard are stories in which people wishing to transfer significant amounts over to low-income families are told that the bank will waive the fees, by which the person means they are going to waive the flat fee but they are going to keep the exchange rate spread, which is often much bigger. I just think you should be telling the customers the whole story.

Mr Comyn : If you will allow me to take it away I'll be happy to engage with you outside the hearing as well.

Dr LEIGH: I'd be delighted. Thank you. NAB has refused to deal with unlicensed debt management firms, so-called debt vultures. Have you considered doing the same?

Mr Comyn : We would certainly seek to not deal with anyone that isn't appropriately licensed and acting in the customer's best interests, provided it's legal for us to do so. Maybe I'll throw to David, because I know he's been looking at this specifically.

Mr Cohen : Yes. We have taken steps to cease dealing with one debt management firm, because our experience with them was that they did not act in the customer's best interests. AFCA has also refused to deal with that particular firm. Our policy overall, which we are implementing—and we have other debt management firms that we are assessing—is that if they do not act in the best interests of the customer, then we won't deal with them. What that means in practice is that we will either approach the customer directly and explain why we will no longer deal with their representative or we will refer that customer to a financial counsellor or a free service like the National Debt Helpline.

From our point of view, the question of whether a firm is licensed or unlicensed is not so much the issue. The most important issue is whether that debt management firm is acting in the best interests of the customer. There is some work currently going on through the ABA whereby both consumer groups and the banks are working towards, and discussing with ASIC, an industry approach, where we'll take a consistent approach to all of those debt management firms. From the banks point of view, we don't want to see any customer disadvantaged because of dealing with somebody who is not acting in their interests, so that is the policy we are pursuing.

Dr LEIGH: Financial Counselling Australia carried out a survey on how major banks were dealing with financial hardship. Of the four majors, CBA's performance was rated lowest, sliding from 7.2 out of 10 in 2017 to 5.9 out of 10. How concerned are you by that, and what steps are you taking to better deal with customers in financial hardship?

Mr Comyn : We were disappointed with that result. I think we were first in the prior survey and we slid down, as you mentioned. I think that's related to the period, if I'm not mistaken, of December 2019. We are fortunate that we engaged closely with Financial Counselling Australia. I think they provide an extremely good service, so I'm confident, and I've certainly followed up with the team to get a handle on exactly what deteriorated and to make sure that we've taken active steps to improve that.

Dr LEIGH: You are reported as using artificial intelligence to triage loan deferral customers. In the context of the government's problems over robodebt, how concerned are you that those artificial intelligence systems might cause more harm than good?

Mr Comyn : I would say there is some degree of separation. We use artificial intelligence, specifically some machine learning techniques, as part of our customer engagement engine. Separate to that, we calculate across a range of different variables the customers that we can see are, in this case, most likely to be in the strongest financial position to be able to recommence their repayments. We can generally do that in particular by seeing the income coming into their account. We can see the transaction account in about 90 per cent of our mortgages. We use the customer engagement engine in that case to personalise a message inside the CommBank app. In this example, we've made it easy for customers to exit from the repayment deferrals. So I'm very confident with those processes. Where there's any doubt about a customer's financial circumstances or it looks like they may be in a more challenging set of circumstances, then we would deal with the customer individually through one of our financial assistance solutions team members, which is why we've added about 750 to that team over the last few months, to be able to deal specifically with about 250,000 calls in the next two months.

Dr LEIGH: What does a teller start on at the Commonwealth Bank?

Mr Comyn : I think the total cost for a teller would be in the order of $60,000 or so.

CHAIR: Is that income, or is that cost?

Mr Comyn : That would be base, plus variable remuneration as well.

Dr LEIGH: That's the lowest-paid employee in the Commonwealth Bank—they're on $60,000?

Mr Comyn : As a full-time equivalent, yes—of that order.

Dr LEIGH: And what was your remuneration package last year?

Mr Comyn : My reported, or take-home pay, was in the annual report on 12 August at $3.9 million.

Dr LEIGH: And when we add in long-term incentives it comes up at a little over $5 million, doesn't it?

Mr Comyn : That's statutory remuneration, which is accounting accruals as well. So it's not the distinction between cash and what I would receive, it's actually the accounting accruals. They do something that's known as a 'fair value for future' entitlement. They include annual leave, long service leave accruals and a whole range of other elements. Whilst it appears statutory for accounting purposes, the take-home or realised pay is a more accurate reflection of the income that was paid to me and to any of my team.

Dr LEIGH: Are you comfortable with the gap between starting tellers and your own remuneration package?

Mr Comyn : I recognise that executive remuneration, not only in banks but across all industries—particularly relativities between CEOs and any member of an organisation—is contentious.

Dr LEIGH: But as the leader of that organisation are you comfortable that you've got it right? I understand that you don't set your own pay, but in some sense you're the recipient of that pay packet and you're setting the tone for the organisation. The gap between the factory floor and the corner office in most Australian organisations has grown significantly over the last couple of generations. Are you comfortable with that?

Mr Comyn : I understand why it's a question on people's minds. I think that in Australia, actually—and certainly in financial services over the last five years—it has reduced substantially from where it was in the decade prior to that. I think it's increased at an accelerated rate in many other countries outside Australia, but that doesn't necessarily make it a good basis of comparison. I think there will always be, and should be, questions raised around remuneration. It needs to be clear, and as we see in Australia there is very clear disclosure—not just about what I earn but what all of the senior leaders at the Commonwealth Bank earn.

Dr LEIGH: How have the disclosures at AMP affected the way in which the Commonwealth Bank deals with issues of sexual harassment? What's changed?

Mr Comyn : I won't make any reference, obviously, to AMP. This is an area around diversity, inclusion, sexual harassment and making sure that people feel safe in the workplace. It's been a critical area of focus for all companies for many years, I think. We've certainly made sure that our policies and what is and isn't acceptable are clear. As I think I said earlier to Mr Wilson, there is regular training across the organisation, particularly for people leaders—anyone who has leadership responsibilities. There is a variety of different mechanisms where staff can feel safe to go to call out any workplace misconduct. Any of those requests or notifications are thoroughly investigated and overseen independently. Of course, as I think I said earlier, where appropriate, some of that information would flow through either to subcommittees or directly to me.

Dr LEIGH: But have there been changes that have taken place? I would have thought that the significant problems at AMP, not just the particular allegations but also the impact those have had on AMP's ability to attract talented senior women, might have led to some change or rethinking within the Commonwealth Bank. You haven't held any significant engagement processes with senior women in the organisation, for example?

Mr Comyn : I would say that, broadly, it applies to a longer time frame. Unfortunately, I don't think this is unique to Australia. This is clearly an area of great focus for many organisations. I think that, particularly in the last few years, there has been a much greater focus on making sure that unacceptable work practices across a range of different areas have been thoroughly stamped out. It's less a question of what may or may not have happened more recently in the media in the last few weeks. Clearly this is a very important focus area to make sure that we've got a diverse, inclusive and safe workplace but also to make sure we can attract, retain and develop absolutely the best talent.

Mr Cohen : What I might add to that is that recent events have given us the opportunity to make sure that the efforts we've made in the past, which Matt has referred to, particularly around encouraging people to speak up and around creating an atmosphere in the organisation where people feel safe to speak up, has certainly increased our focus around that. We think that's one of the most important elements in order to unearth inappropriate behaviour: to have people feeling safe to speaking up. Also, it's about having the means to speak up and, when they do speak up, having that issue dealt with in an appropriate way, particularly where confidentiality can be absolutely paramount.

Dr LEIGH: Thank you.

Mr FALINSKI: Matt, do you remember what your first job was?

Mr Comyn : Yes, I do, Mr Falinski.

Mr FALINSKI: How long ago was it? What year?

Mr Comyn : My first job in financial services or first job as—

Mr FALINSKI: Both.

Mr Comyn : I was a lousy newspaper deliverer.

CHAIR: Excuse me, the chair was a newspaper deliverer—proudly!

Dr LEIGH: I was a newspaper deliverer too.

CHAIR: Yes, as was the deputy chair. Look where we all ended up!

Mr Comyn : There are many of us who've started out—

Mr FALINSKI: I'd much rather be in the papers rather than delivering it.

Mr Comyn : Yes—well, that's not true. I started in the Commonwealth Bank in 1999, and my first job was as a business analyst in the institutional banking division.

Mr FALINSKI: Do you remember how much you were paid in 1999?

Mr Comyn : I think my total remuneration was about $40,000.

Mr FALINSKI: Interesting. There's hope for all of us, Matt.

CHAIR: I do think it's appropriate for you to refer to the witnesses by their surnames—that is, Mr Comyn et cetera—like it should be for you, Mr Falinski.

Mr FALINSKI: Fair enough. Mr Comyn, previously when you appeared before this committee you talked about your desire or strategy to turn the Commonwealth Bank into, I think you called it, a simple bank?

Mr Comyn : A simpler, better bank.

Mr FALINSKI: A simpler, better bank. I have two questions on this. How is that strategy going? What are some [inaudible] facing outcomes?

Mr Comyn : Sorry, I lost the last part of that question.

Mr FALINSKI: Maybe the chair could mute his microphone. I was going to ask: how is the implementation of that strategy going and what are some of the public facing outcomes that the committee should be looking for?

Mr Comyn : In particular on the second part of that question there are a couple of things on the simplicity. Clearly we've decided to make some changes to our portfolio and divest a number of businesses, particularly from wealth management. The completion of those divestments have been well documented.

I think probably the other area that is most easy for people to measure would be in response to the prudential inquiry of May 2018. There were a number of recommendations that came out of that inquiry. We set about a very substantial remedial action plan as part of that. We have an independent expert, which is Promontory, which oversees our progress. We publish all of their progress reports—that is, our full year results. On 12 August we published their latest report. It' shows that we have completed about 79 per cent of the milestones as part of that program, so clearly we're making good progress but there's still more work to do. There are a number of improvements and changes that we've made, very consciously and deliberately, which, I think, have made a big difference in terms of the organisation and the outcomes we're delivering for our customers, but there's still more work to do and we're very focused on it.

Mr FALINSKI: In terms of some of that ongoing program, have you discovered that there were some perverse incentives within your organisation that were delivering outcomes that were not good for prudential outcomes for customers, shareholders and staff working at the bank that you've removed?

Mr Comyn : Well, I think there's a range of different changes we've made; specifically in and around performance management. But, for us and the broader industry, there's some work that was done by Steven Sedgwick as part of the review into remuneration and incentives. Clearly, that was clearly an area of focus by Commissioner Hayne as well. So there have been substantial changes to the way people are paid, and the weightings, particularly around financial performance. My personal performance is weighted to 30 per cent in the in-year performance. Historically, a CEO would generally be somewhere in the order of 60 or 70 per cent financial performance. That flows all the way through into different parts of the organisation. We've certainly seen examples where incentives and the design of those incentives can deliver—in the past—unexpected and, unfortunately, poor outcomes.

Mr FALINSKI: What are some of the things that you are now measured on that maybe some of your predecessors weren't?

Mr Comyn : On a broader range of measures—so, specifically, I've got an element which is around all of the non-financial measures, for example, customers—from our perspective, the board will assess my performance both in terms of net promoter score improvement as well as improvement in areas around complaints. I have a specific part of my performance which is measured around how we're going against the remedial action plan that was put in place in response to the APRA inquiry. That was actually one of the requirements following the APRA inquiry—that all senior executives in the organisation had a minimum amount of their overall performance that would be measured based on our success there. And then I have a range of other areas that are focused on the performance around risk, in particular; values; and then areas around strategy as well.

Mr FALINSKI: Are you a director as well as the CEO?

Mr Comyn : Yes, I am.

Mr FALINSKI: So how does the board deal with the inherent conflict that can exist where it might be made more difficult to lodge a complaint or where complaints are defined in different ways so that they don't make it into the actual figures?

Mr Comyn : Specifically in the area of complaints, that's actually one of the top areas in the board focus for this particular calendar year. And so generally there is a complaints update every single time the board meets; specifically, David is there, and generally one of the other business units heads is there. We have very substantial reporting around complaints. I think we're actually very robust in the capture of our complaints. ASIC has come and done an onsite review of us—and I'm sure they have of other financial institutions—in our overall complaint-handling processes. We've had AFCA attend our board meetings as well, so that directors can get first-hand experience from the complaints authority, to just get a sense of where CBA is doing well and where are the areas that we need to focus. So we get a combination of real-time examples that the board will see and regular reporting and updates, then supplemented or augmented by external insights from people who would otherwise be experiencing feedback from our customers when something's gone wrong, and I think AFCA is a very good example of that.

Mr Cohen : I would add that we actually take a very assiduous approach to recording every complaint. And, whilst that might lead to, on its face, a very large number of complaints, we feel that the culture around reporting every complaint is key. That gets reported, as Matt said, through to the board. But perhaps the important aspect of it is that, from our point of view, we don't treat complaints as a detriment but rather as a benefit, in the sense that we can learn from those complaints. Actually recording every complaint and looking at those complaints and what lies behind them and what the root cause is helps us become a simpler and better bank. So it's quite an important source of information. So, in fact, the incentive is to look for the detail of the complaints and to report them in detail rather than the reverse.

Mr FALINSKI: In this transformation program that you've been undertaking, is there any data or are there any insights that you've gained along the way that you think would be useful in terms of design of public policy and legislation that currently applies to the financial sector?

Mr Comyn : There certainly would be. If you wouldn't mind, if I could just go away and think about what would be most helpful and constructive. But, certainly, there are a number of things that we've learnt. We've worked closely as a team with the board. As I said, it's been a substantial program, and we've shared some of those insights and learnings with regulators. I still believe that there is considerable work to do to become simpler as an organisation in terms of the way we serve our customers. There are many aspects of large financial institutions that aren't simple. By and large people act rationally and follow processes, so there's quite a bit more work that we need to do to make sure that we're simplifying the way that we serve our customers in particular.

Mr FALINSKI: I will ask some quick-fire questions. Given what's going on at the moment, have you gone back and looked at your risk framework? Have there been any updates to that—underlying assumptions? Have you put new systems in place? Have there been any changes to the way that you're assessing risk and the way that you're looking at the loans and liabilities that you currently have?

Mr Comyn : All of the above. We spend about $1.4 billion a year on technology-related spend. About 70 per cent of that would be related to risk and regulatory fraud—everything from financial crimes, cyber, privacy. Clearly within the financial risk models there's a lot of work underway around financial risk management. We're constantly looking at what we're seeing at the moment and stress testing that against our previous experience. We're looking offshore at other international insights.

Mr FALINSKI: I do want to come back to that, but I want to two unpleasant things out of the way first. The first is ASIC and your remediation. Karen Chester gave evidence, to either this committee or the parliamentary joint committee on corporations, that she has no early remediation programs in front of her. At any point has CBA submitted a remediation program to ASIC?

Mr Comyn : Are you speaking specifically about aligned advice remediation? I assume that's what you are speaking about.

Mr FALINSKI: I'm actually speaking about all of it, but, yes, I think aligned advice was the topic of conversation.

Mr Comyn : That's certainly the most challenging remediation that we, and the broader industry, face, because of, unfortunately, the substantial time frame and the absence of documentation. We have, as you would expect, worked with the regulator, and continue to work with the regulator, to try and find ways to accelerate the remediation. I think so far our progress is much slower than we would have liked. We're very focused. Given the scale of the dollars that are there we want to refund those customers as quickly as possible.

Mr FALINSKI: You've made provisions for this remediation. Is that the case?

Mr Comyn : Yes, that's right.

Mr FALINSKI: That money is sitting on your balance sheet already, isn't it?

Mr Comyn : That is right. We would prefer to pay it out as quickly as possible.

Mr FALINSKI: You would prefer to get that off, understood. One of the criticisms that ASIC makes of the banks, including CBA, is that you've engaged very expensive advisers. I think they're referring to companies such as EY and PwC. I take it that you would prefer to just move on with closing out the remediation issue rather than continuously engaging outside advisers. Would that be the case?

Mr Comyn : Yes, that is right. We have hundreds of people in our internal team, but we have also tried to supplement that with external advisers, mainly because we're trying to find a faster way to return money to our customers. Remediation projects is an example where we don't have the resources internally, given everything else that we've got on. We're just trying to find ways to accelerate those programs. I share the frustration about the overall lack of progress in this particular area.

Mr FALINSKI: You have provided a lot of clarity in the last few minutes, so thank you for that. The other thing is responsible lending obligations. I do apologise for doing this, but I'm afraid we have to ask the question. From what you have said to us today, it would appear that responsible lending obligations have become, through no fault of your own, a capacity for current providers of credit in the market to ensure that they have an advantage over people trying to enter the market. You have both data and systems in place to be able to do those processes very quickly, whereas new entrants to the market wouldn't have any of those leads. Is that an unfair statement?

Mr Comyn : I wouldn't characterise it in that way, simply because I don't think it's a distinction between existing or new entrants. I think it is simply a case of the process having changed over time around responsible lending, particularly as it relates to housing. For any company—and some of the bigger companies are having more difficulties than the smaller companies—if you haven't been able to actually operationalise those processes with large numbers of people or investments in technology to try to automate those processes, it's possible that the time that it's taking to turn around or approve a home loan has increased. I think that—

Mr FALINSKI: It's more expensive as well if you can't operationalise it or automate it as you've suggested.

Mr Comyn : Yes, that's right. As is the case for any process, when you provide more and more specificity, particularly in a couple of areas, financial institutions—and this is not a criticism of the regulators; this is specifically something that was examined in the royal commission. Questions were asked about why banks weren't doing more. The regulators provided guidance. All institutions are now interpreting it and have tried to operationalise that guidance. We've been able to operate successfully through that period, but there's no question that lending standards have evolved. The question is: is it appropriate? Given that for many customers it's the most significant financial decision or loan that they will take on, I think you can make that case. But banks, in and of themselves, are less able to rely on the information that customers provide us. There is more required to verify the information than there was in the past. Some may believe that that's gone—

Teleconference interrupted—

CHAIR: Mr Falinski, you're at the end of your time. This is your final question. I'll give you more time before the break.

Mr Comyn : I lost you just towards the end.

CHAIR: We lost you too.

Mr FALINSKI: Matt, this is an actual story that relates to a CBA customer. I'm not raising it within this environment to embarrass the CBA. Rather, I'm raising it because I'm concerned that the laws that the parliament have imposed and the way that the regulators are dealing with them is making it almost impossible for financial institutions. This is a woman who was buying a house in Port Macquarie. She got pre-approval for the house. She was a paralegal; she'd completed her law degree. The CBA had given her pre-approval for a loan to buy land and house. Then she completed her 12 months as a paralegal and became a junior solicitor. At that point, the CBA said, 'We have to withdraw the pre-approval that we gave you. We have to wait six months to make sure that you continue to have continuity of employment.' When she made the obvious statement, as people not involved in this process would, 'This is a bit silly. I haven't changed employers. I'm actually now earning more money; it's just my role that's changed,' she was legitimately told, 'Under responsible lending obligations'—under the regulatory guidance provided by the regulator—'we think that is the appropriate thing for us to do.' That's what your loan officer said to her. That is obviously having an impact on economic activity in the Australian economy.

Mr Comyn : David has indicated that he's aware of this particular customer, so I might let him answer. Then I'd be happy to talk it more broadly, because I hear feedback from a number of different quarters.

Mr Cohen : If I recall correctly, this was a complaint that actually did come across my desk. We looked into it, and it was through no fault of our frontline people, to be honest. They were doing what they thought was the right thing to do and they were being prudent. I can't recall exactly now how the actual matter ended up, but I know that we had our specialist team go back in and look at it and talk with the lending team, and I believe they came to a sensible resolution. The reason I mentioned that it was through no fault of the front line is simply because we did have certain guidelines in place. Those guidelines reflected what we understood was required under the guidance we had received from regulators. It's probably a good example of how we are, on a regular basis, finetuning the way we approach things in order to be able to reach the right outcomes.

CHAIR: Mr Falinski, I really am going to have to deduct from your time. You went substantially over. I will now go to Dr Mulino and then Mr Simmonds for 15 minutes each.

Mr FALINSKI: Am I allowed to say thank you to David and Matt?

Dr MULINO: Thanks, Mr Comyn and Mr Cohen, for giving evidence today. I just want to start with the AML/CTF breaches. I think the investigation that ASIC undertook has recently concluded. I am just curious as to what your view is on lessons learned and whether there are any specific ways in which the organisation has strengthened its internal capacity either in terms of IT or with your own internal team.

Mr Comyn : Thanks for the question. Many lessons have been learned and an enormous amount of work has gone in. It's been probably the single biggest focus from our overall risk teams. We've added substantial resources—more than a thousand people—to our financial crimes compliance, both monitoring and very significant system investments—everything from improving the quality of data in transaction monitoring to basically every element of the act. We're making sure that we're improving and strengthening our capability. Putting aside the investigation, which has been going on for almost three years, it's been a huge focus for the Commonwealth Bank. Whilst we have improved, I think, dramatically and strengthened a number of different areas, it will remain an area of significant investment and focus for years to come.

Dr MULINO: Does it involve significant additional IT investment and additional use of, for example, AI? Do you think there's been progress on that front?

Mr Comyn : Very substantial IT investment. It would be the single largest IT investment we're making each year and has been basically since 2017. It is more than $100 million. It was the same last financial year. There is some scope and application around AI. An enormous proportion of that investment is across the entire organisation—both internationally and domestically. It is particularly about making sure that we've got high-quality, up-to-date data. There are, of course, more advanced data and analytical techniques which play a role, but I wouldn't say that's been the majority of our investment to date.

Dr MULINO: The other dimension of this which I'd be interested in your views on is that obviously the Australian regime relies to a large extent on banks self-reporting. Do you have views on whether the Australian AML/CTF regime could be strengthened by bringing non-financial entities and professionals under the umbrella—for example, real estate agents, lawyers, and so on—as has occurred in a number of other jurisdictions?

Mr Comyn : I know AUSTRAC have been looking closely at that. Clearly that's an area of legislative change, and perhaps I'll leave it to them. Specifically, as you would expect, we've worked very closely and constructively with AUSTRAC since our issues in 2017 to strengthen our own monitoring and compliance, and we're also working very closely with them and other financial institutions across the financial intelligence alliance to make sure that we're doing everything we can to prevent and disrupt financial crime.

Dr MULINO: Right. But it does affect you in terms of things of KYC and your ability to understand what a transaction is, potentially?

Mr Comyn : Absolutely. KYC is a very important element of AML/CTF compliance, both at an institution level in the Commonwealth Bank and more broadly. There are certainly some aspects of, let's say, the broader ecosystem that would be helpful in terms of making sure there's high-quality and accurate data, with the right level of privacy and consent around that, to make sure that both financial institutions and the government have the most accurate information we can possibly have on who are the individuals and, at times, companies that we're dealing with.

Dr MULINO: I will just follow on from—and I'm just going to say this to annoy him—Mr Falinski's question on remediation. I'd be curious. Obviously, there are a number of cases that have been under examination for years, and this is clearly a problem for a lot of people who are waiting upon that money. Every bank that comes before us talks about the fact that they've made provision and they want to get the money out the door. What kinds of concrete steps or changes in the process do you suggest to make this process faster?

Mr Comyn : The first thing I'd say is that it's taken too long, particularly around this remediation by aligned advisers. Unlike salaried advisers who work for the Commonwealth Bank, we completed that remediation, which was approximately $150 million, some years ago. The difficulty, which is an explanation rather than an excuse, around aligned advisers, who never worked for the Commonwealth Bank, is that they were typically running their own businesses but they operated under one of our financial services licences, which means we are liable. In some cases, we're going back up to 10 years ago, trying to track down individual advisers. In one example, we're actually going back to approximately four years before the Commonwealth Bank even owned or had anything to do with a particular financial service licence, trying to track down the advisers and understand what their record keeping is—because there's a combination of customers who may have paid for a service they didn't receive and customers who may have received the service but the record keeping, which is a critical requirement, isn't adequate or robust enough, which means they need to be refunded in full, with compound interest applied to that. Hence the dollars are very substantial.

In the case of the Commonwealth Bank, we recently increased our provisions—our total provisions in this area amount to $834 million—and effectively that's refunding money that was paid to advisers, not to the bank, plus compound interest over that period. So, unfortunately, it is complex. We would acknowledge it's taking too long. We share the regulator's frustration, and it's incumbent upon us to distribute the funds back to customers as quickly as we possibly can.

Dr MULINO: I get that it's complex and there are a lot of resources devoted to it. Isn't it fair to say, though, that there must be some wiggle room at the margin, where, if you were to err on the side of the victim, it would speed the whole thing up?

Mr Comyn : Yes, and we've explored and we continue to explore a numbers of different ways in which that might be possible. As you'd appreciate, contemplating paying customers more, in effect, than they might have otherwise been entitled to if we'd gone through a thorough remediation, is in our minds fine and appropriate. Of course, you can't do that across the entire customer base because, again, these are fees or income that was never received by the Commonwealth Bank, and you can imagine shareholders, quite rightly, would feel strongly—as the owners of any company would—about refunding things that customers actually were not entitled to. There is certainly a trade-off between the customers who, let's say, are owed a small amount of money and the cost of trying to investigate whether or not that amount of money is owed, because that cost could actually be larger than the money that's owed. So it's a very straightforward decision to refund those customers immediately, with interest, without trying to complete an investigation. But, unfortunately, the record keeping is not good in this particular area, and that has been a significant impediment to completing the remediation in what we or any reasonable person would consider an appropriate time frame.

Dr MULINO: Agreed. I would just note that there are a considerable amount of resources being expended on behalf of shareholders, so that does give you a margin for error, in a sense.

Mr Comyn : Absolutely, and we've certainly incorporated that in the way we've thought about it.

Dr MULINO: I have one quick question to put on notice—and I'll ask this of all the banks. I'd appreciate it if you could give a bit of summary data on the average length of time and perhaps some distributional data on how long cases have been under examination.

Mr Comyn : Sure. Specifically within aligned advice or just more broadly around—

Dr MULINO: Whatever data you've got. Breaking it down into the key categories and summary data for each category would be useful.

Mr Comyn : Okay.

Dr MULINO: Thank you. I had a couple of questions just digging into some of the stuff the chair asked about earlier on around the state of the economy. This is obviously a very difficult economy to model, and you've already alluded to some of the challenges. One of the challenges, as I see it is, is that, in any modelling, you've got a whole bunch of assumptions that you need to plug in, and there's always sensitivity to those assumptions. But there does seem to me to be what I would call discontinuities—and you could call it a range of different things—for example, whether or not a large state goes into lockdown or when a vaccine is found. As everybody who is modelling the macroeconomy agrees, really, this is being driven by the public health outcomes at the minute. I'm just curious: in terms of the scenarios that you're modelling on top of the reference numbers coming out of your core model, are there scenarios that keep you awake at night? And what's driving those?

Mr Cohen : If you think about even the way we've distinguished between our central scenario—which, as I said earlier, is very closely aligned with the Reserve Bank's—versus, let's say, a more severe and prolonged downturn, the biggest difference between those two scenarios is just a much higher unemployment rate for a lot longer. Clearly, there's also an associated rate of fall in house prices. Over the last few months, we've put out our third-quarter results in May; that was when we pulled together and provided for an extra $1½ billion of additional credit losses. Since that time, we would say, actually, with the exception of Victoria, all of the other states and territories have performed better than we were expecting at that time. The economic contraction, even at seven per cent for the June quarter, was less than people were contemplating—significantly less than in March.

As you said, it is highly uncertain from here, in terms of the speed of the health outcomes. We don't base any of our scenarios on specific treatment breakthroughs or a vaccine, but there are a wide range of different outcomes that could be achieved, based on how effectively the pandemic is suppressed and also what state of economic containment or lockdown there is. Clearly there'll be a period where our population growth is effectively halved, if there isn't any international migration. That really weighs heavily in the outer years, in terms of the scenarios that we model.

So, from our perspective, we've certainly analysed and prepared for a number of very severe scenarios, by making sure we've got the financial resources and, in particular, the capital to withstand that, and to be able to support the economy through that, and then of course to do everything we can to try and work with governments, our customers and regulators to deliver the best possible set of outcomes, which, by and large, has been, I think, extremely effective over the last few months.

Dr MULINO: As you say, a lot of the modelling scenarios that the banks traditionally undertake look at different levels of unemployment and house prices as key determinants of, for example, default rates. Isn't it fair to say that the unemployment rate at the moment is more tricky to interpret than usual because of programs like JobKeeper which have broad political support? Doesn't that mean that another factor that needs to be explicitly considered is the level of government support going into the economy and, in a sense, that is going to be a key determinant of the kinds of scenarios that unfold?

Mr Comyn : Absolutely it is. One of the big determinants is the introduction of that substantial support from, let's say, mid-March to late March, with the income support from JobKeeper and JobSeeker. That has provided very substantial income support to the economy. I think, appropriately, that's going to have to be tapered at a point in time. We've based that in. Equally what will be important will be the level of fiscal stimulus, at both federal and state level, effectively to create aggregate demand for goods and services in the economy and to create jobs. They're going to need to come from a variety of different areas—obviously, infrastructure is a key area. I think the test, ultimately, of the success of the Commonwealth Bank and certainly the financial performance of the Commonwealth Bank will be largely tied to the underlying economic activity in Australia. We are perfectly aligned with the scenario of trying to increase jobs, in particular, and reduce that unemployment rate as quickly as possible.

CHAIR: Final question, Dr Mulino.

Dr MULINO: Okay. Just on that issue, I think everybody agrees it should be tapered at some point, but it's also fair to say, isn't it, that, with borrowing costs for government, like everybody, at zero, that level of government support should reflect changes in the underlying condition of the economy and changes, for example, in the public health outcomes, and that it should be sufficient to reflect the need for support for the economy and for households and for SMEs?

Mr Comyn : Well, you're right insofar as borrowing costs are very low, and clearly that support can come in a number of different ways: income support, which is what was required to be put in place very rapidly and, I believe, very effectively. Now I know the federal government and the state governments are very focused on support, insofar as trying to create jobs, so that the economic recovery, alongside the health control, can be as effective as possible.

Dr MULINO: Thanks.

Mr SIMMONDS: Thanks, Mr Comyn, for your evidence thus far. And, if Mr Falinski is keeping a record, just for the record, I was a Pizza Hut delivery driver for my first job, not too far from a paper boy. Has the CBA experienced a drop in personal credit card debt levels during COVID?

Mr Comyn : Yes, we have, particularly in our June quarter. For the three months April to June we saw, approximately, a $2 billion reduction or just under a 20 per cent reduction in balances in credit cards and about a 16 or 17 per cent reduction in personal lending. So it's been a very substantial reduction in unsecured credit.

Mr SIMMONDS: That's a pretty significant reduction, as you say. Would it be fair to posit, then, that people who are accessing government support, like having the ability to withdraw from their super, are taking the opportunity to restructure their own household balance sheets away from high interest debt?

Mr Comyn : I think that's true. I think there would be examples where customers are saving those funds or they're paying down expensive forms of debt. There have certainly been some examples of that, particularly, as I said, with much more material in the unsecured portfolio.

Mr SIMMONDS: Can I turn to the issue of small transactions being used as a messaging service, particularly around domestic violence situations and things like that. It's something that is of significant concern for me. What steps are the bank taking to identify these kinds of instances?

Mr Comyn : You may be aware that we identified this last year, and one of the team, specifically in our vulnerability area, which David looks after, identified this. We did a lot of work. As your question would suggest, we were horrified to see some of the examples of misuse of our payment services where people were sending abusive and threatening messages. We've done a significant amount of work since then, including amending our terms of use, working closely with the industry to see—and I know that other financial institutions are just as passionate about making sure that this sort of behaviour is eradicated. We've prevented or progressively prevented customers from being able to use certain words as part of the message description, both in our ATMs as well as into our mobile banking app. I don't know, David, if there's anything you want to add?

Mr Cohen : I'd just add this. It's a piece of work we're particularly proud of, because, as Matt mentioned, a member of the team noticed this in one instance. When we dug into it we were horrified to see the extent of it. We looked over a three-month period. We found 8,000 instances where, effectively, violence was being threatened or there was some form of domestic abuse being threatened through the transaction description. That's quite a big number in a short period of time. What we've done since then is we thought it important not just to take steps ourselves to prevent that, such as changing the terms and conditions. We've blocked those sorts of descriptions on our Intelligent Deposit Machines but also in the process of enhancing the blocks that we've got around our NetBank, internet banking and our app, and, most importantly, in making sure the industry as a whole know about it. We did take it to the ABA and it's been really pleasing to see the take-up by other financial institutions who have also become aware of it, have looked into it and are now taking steps as well.

Mr SIMMONDS: I appreciate that, and those are horrifyingly large figures. What kinds of words are you tracking? We heard from ANZ that they are, essentially, tracking swear words. But what about a situation where somebody sends a message like, 'I will kill you'? Are those kinds of things picked up by the bank?

Mr Cohen : Yes. Those are exactly the sorts of things that we're building, at the moment, into, effectively, a dictionary or phrase library of offensive or troublesome phrases and words, and, yes, it does go to threats of violence. It goes to swear words but also just very derogatory names that we see coming through these descriptions. It's quite a broad range. It's not just swear words.

Mr SIMMONDS: So you're building this capacity. What is your view of your ethical responsibilities? Is it to simply cut off the customer from saying those things, is it to cut off the customer's access to be a customer or is it reporting it to the police, in terms of a threat of violence?

Mr Cohen : We have changed the terms and conditions. One of the impacts of that is that if we have customers who abuse our payment systems in order to perpetrate violence or to make threats of violence then we can switch those customers off as customers. So they can no longer bank with us.

The question of reporting to authorities is a slightly more difficult one. We don't at the moment and it's rather difficult to implement real-time monitoring of every transaction that goes through. From our point of view, we're starting off on the basis that, first of all, we want to stop the abuse, where we can. Secondly, we want to stop those customers being customers if they perpetuate it. The step that you're referring to, which is going the next step, is probably something that we would have to look at; it's just the practicality of doing that. I understand the desirability, because it's a serious problem that needs to be stamped out.

Mr SIMMONDS: Okay, that's much appreciated. I'd welcome any information which expands on your answers which you could send me and the rest of the committee on this particular issue. You've had some publicity around the investments you're making in buy-now-pay-later-style credit facilities. From the bank's point of view, how sustainable is this? We've seen the rise of it recently—how sustainable is this as a form of debt? What safeguards are in place from the bank's point of view? And also: when you consider the companies which are offering this facility, and which you're investing in, do they consider the customer's entire capacity to pay as opposed to just accepting their buy-now pay-later application on its face value?

Mr Comyn : Thank you for that. There are a couple of things: we invested both in the global company as well as working closely with a company called Klarna to develop the service here. We've worked with them deliberately to set aside a set of standards for ourselves which, in some cases, differ from other buy-now pay-later providers. An example of that would be very thorough know-your-customer checks. Another would be checking credit-reporting bureaus for evidence of any outstanding liabilities to make sure from our perspective that we believe it's responsible, even though responsible lending doesn't apply to this particular sector.

To your broader point and the question around sustainability: it remains to be seen. Clearly, it's become very popular. The credit card product is quite challenged in Australia. There are reasons why customers are using buy now pay later, insofar as access to credit goes—even though it's not referred to as credit it certainly looks a lot like credit to me. It's very effective and customers enjoy it. That's why you've seen such a large increase in buy now pay later as a function of the broader market. What level it continues to grow at remains to be seen.

Mr SIMMONDS: I accept it's popular; it's certainly popular in my household, I have to say, but it does scare the bejesus out of me a little bit in terms of the unsecured nature of the credit and how much people are looking into people's actual capacity to pay. I take your point, which is great, that you're going above and beyond, but do you think the appropriate regulation is in place for this type of credit or do you think we need to play catch-up with the market?

Mr Comyn : It clearly is an area of emerging innovation so I think it's appropriate that there's been a different posture on the sector. Clearly, ASIC have done a review on this particular area and no doubt they're continuing to watch that. To support the right level of innovation, I think it's important that there is competition both in the existing aspects of the market and also for the new and emerging. Generally what happens is that as industries or products become much larger and more popular, and the usage expands, then there generally will be more scrutiny around some of the consequences of that and perhaps some of the vulnerabilities that particular customers may have. I will leave it to the regulators, ultimately, to make those decisions, but I have no doubt, given the size of the industry now, that it must be being reviewed very closely.

Mr SIMMONDS: Okay. In terms of recovery from the COVID recession: obviously, different states are at different stages and have different policies in place. I've got a view around the Queensland border closures, my state, and how that is particularly hurting the tourism industry. What's the CBA's experience with distressed businesses in Queensland, particularly around the tourism industry?

Mr Comyn : At the moment the substantial federal income support is probably masking some of the underlying stress and so I think it will become more evident, if the borders remain closed, as that income support reduces. There's no question that the Queensland economy has a higher proportion of reliance on tourism and a significant reliance around hospitality, so there have to be some sectors of the business community there that would be suffering from the ongoing border closures and lack of clarity about when those borders may reopen.

Mr SIMMONDS: Have you got any data around insolvencies that you're expecting broken down by state?

Mr Comyn : We don't necessarily have a forecast of insolvencies by state per se, but we have in-depth reviews of individual sectors. Within tourism, retail, hospitality, we look at our exposures and our customers all around the country and, based on what we see as their outlook and forecast, we will then provide for future credit losses accordingly.

Mr SIMMONDS: If any of that data could be provided to the committee, I'd appreciate that. Final question, Chair, because I know you're keen to get to a break. You talked about the government-backed SME loans, the government guaranteed ones, and I think it's to your credit that you've facilitated such a large proportion of them for Australian businesses, so thank you. In terms of those that have been approved, what is your experience of the customers and their situations in terms of those who are benefiting from the line of credit?

Mr Comyn : As you'd expect, there's a wide variation across those customers and I think it's one of the reasons they're included in the opening statement. There have also been some great examples of customers who've used those lines in the example I referenced earlier: a homewares retailer in Tasmania has actually expanded and increased their profitability post COVID. Homewares and home improvements are an area of retail which have done extremely well. We've had a combination of customers who have taken up the SME loan guarantee who've been able to pay for essential bills and payments, including to their own staff. We've had others who've used some of that money to pivot their business or make adjustments to the way that they're operating, so I think there have been some really good outcomes. Clearly, there'll also be some customers who continue to be very challenged and will need further support going forward, particularly if they're in those sectors and particular geographies that are hardest hit.

CHAIR: Just before we go to a break, I think Mr Simmonds has raised a really interesting line of questioning around identification of conduct which amounts to different types of harassment or violence. I'm just wondering: does CBA have a program in place to identify instances of elder abuse?

Mr Cohen : Yes, Chair, we do. In fact what we've done is we've undertaken training across, particularly, our frontline teams. We've introduced a guide that helps our people but also our customers to understand and identify instances of elder abuse. This is part and parcel of the efforts that we've made over the last 18 months in particular to improve outcomes for vulnerable customers and, obviously, elderly customers do fall into that category, particularly financial abuse of elderly customers.

CHAIR: Would you be prepared to provide that document or that guidance to the committee either on a confidential or public basis?

Mr Cohen : It's a public document, and we're very happy to provide it.

CHAIR: Thank you. That would be appreciated.

Proceedings suspended from 15:04 to 15:15

Dr ALY: Gentlemen, I apologise for not being present earlier and I apologise if any of the questions that I ask have been answered either in part or in full. I want to go to the subject of loan deferrals, particularly around mortgages. Some of the other banks have reported that their number of loan deferrals has recently fallen. With your bank, have loan deferrals fallen in the last, say, four to six months?

Mr Comyn : Our home loan deferrals peaked at about 154,000. That peak would have been in April-May. Then they reduced by about 20,000. As at the end of July, they were increasing slightly in Victoria but still continuing to reduce in other states. I think we will finish August roughly at about 134,000 or 135,000.

Dr ALY: What do you attribute the fall to primarily?

Mr Comyn : What we saw in our home lending book was that approximately 25 per cent of our customers were continuing to make some form of repayment. As you would appreciate, going back to when the vast majority of the deferrals were taken out, which was in between late March and Easter, 9 and 10 April, there was a lot of uncertainty. I think some of our customers haven't been as severely impacted as they might have otherwise been, and hence have been able to continue making their repayments and felt comfortable to come out of the repayment deferral. For others, even where they have continued to make at least some form of repayment, they've opted to stay in the six-month repayment deferral, even though they understand—and we've gone to lengths to make sure they understand—they have the potential of paying more interest over the life of the loan. They've chosen to keep the flexibility intact, given their circumstances, which is understandable given the level of uncertainty that we all face at the moment.

Dr ALY: Was one of the options that you've given to your customers to be able to move to paying interest only?

Mr Comyn : Yes. There are a number of options that we're offering for customers as they're coming out of the six-month repayment deferrals, which for most customers end at the end of September into early October. One of those options would be if it was suitable for a customer to move from principal and interest to interest only.

Dr ALY: Do you have any information or data on how many people have taken up the interest-only option or have moved to an interest-only option?

Mr Comyn : Not yet. We will probably by early to mid-October. As you can appreciate, the update on repayment deferrals, particularly how many customers have come out of a repayment deferral, and, of those that haven't, how many have gone on to a deferral, increased their loan term, gone on to interest only, will be an area of real interest for the market. So we will look to make some sort of public disclosure either in October or in our first quarter results, which would be in November—and of course we'd be happy to share that information with you at that time.

Dr ALY: What are some of the more adverse outcomes for people moving to an interest-only option?

Mr Comyn : What are some of the more adverse outcomes?

Dr ALY: Yes.

Mr Comyn : Generally, if you're not paying any principal then you are extending the term of your loan. Generally, a mortgage is originated under a 30-year loan term. Many customers, given their circumstances, repay the loan much faster than that. But if you are reducing your repayment, including reducing to just interest-only, then clearly you are extending the principal over a longer period of time, which means that you are, in effect, going to pay more interest over the life of the loan.

Dr ALY: S&P recently said:

Deferrals mask COVID's true impact—

I think they used 'impact'.

on arrears because lenders aren't including loans under COVID hardship arrangements in traditional arrears reporting.

Would you agree with that?

Mr Comyn : Yes, I would. They do by design. One of the aspects of the repayment deferrals which has been very helpful and has enabled the industry to offer them has been clarity in working closely with APRA, specifically around the capital treatment or how much capital we need to set aside for individual loans. Ordinarily, if a customer wasn't making a repayment, it would effectively age the loan and go into arrears, and the capital would increase. In effect, what has happened with these six-month repayment deferrals is it has allowed financial institutions to—for want of a better, simpler explanation—stop the clock, so they don't show up in our arrears. They are effectively paused—the repayments are paused, the stage of their arrears is paused; therefore, it doesn't attract additional capital, which is why financial institutions, both large and small, have been able to offer repayment deferrals. There is no question it does mask some of the underlying potential strain in the broader portfolio but it does so transparently and by design.

Dr ALY: So let's say there was a client who already had some issues with arrears. For example, Western Australia has had the highest number of arrears and performs quite poorly in that area. There are particular suburbs in WA that have traditionally performed poorly in that area. Say a customer who had a history of arrears then came and moved into a deferral plan with your bank, would you count that in your traditional arrears reporting or would you count that as part of your deferral reporting, COVID-19?

Mr Comyn : It would depend on the individual customer's circumstances. It sounds a bit like, in the theoretical example that you are giving, someone who was in significant financial difficulty pre-COVID. There are still customers in arrears and there are customers that are going through various stages decisions with sales of their property. They are excluded in some cases from the repayment deferrals. The repayment deferrals were broadly offered as a category of options for customers. As we work through the expiry of the six-month period, in particular, institutions need to assess a customer's ability and capacity to be able to repay, not just today but into the future. Clearly, if a customer has very little prospect of being able to recover from the financial situation they are in, which, generally speaking, would mean they were in real difficulty pre-COVID, then it would not be possible to just keep them putting them on repayment deferrals because that would otherwise sort of mask and delay the inevitable. Fortunately, they are very much in the minority.

Dr ALY: But how have you been dealing with customers like that, customers who are already in arrears, perhaps already suffering mortgage stress prior to COVID—I guess COVID has basically compounded that—and they have sought instead to utilise the deferral options?

Mr Comyn : Again, it would vary. There might be a customer who was starting to fall behind in their arrears. Depending on the sector they were in, the key areas we would look at including how their income has been affected, what sector they are in, the likelihood of that sector being able to recover. Clearly many sectors have been supported by a combination of particularly of JobKeeper and also in some cases JobSeeker perhaps for one of the borrowers in a dual-party loan. So there certainly have been examples of customers that were in some difficulty, maybe not quite in arrears but they've used that payment deferral to try and build up a bit more capacity to be able to resume their repayments. Fortunately, because the arrears rate was very low—to give you an idea, our 90-days arrears rate I think is about 61 basis points. That's very low on global statements. It's just over half of one per cent. And this is the same for business customers: if they were in a very challenging financial situation pre-COVID then, potentially, we'd be having those discussions with them about whether liquidation or administration was more appropriate. For a customer in a personal situation, we'd be talking about restructuring their loan or an investment loan or some sort of sale process to try and reduce their debt burden, particularly given asset prices, at least to date, haven't been impacted very much.

Dr ALY: Let's talk about restructuring loans. There was a case study that was reported recently, albeit not with your bank, about a woman whose income was affected by COVID. She then sought to restructure her loan from a fixed-term loan to a variable rate because the variable rate was better due to the fact that her income was impacted by COVID. She was told by the bank that there would be a breaking fee of $13,000 to do that. In the case of your bank, should that be an option to somebody who is in a situation where they're assessing their options so they can continue to pay their mortgage—that is, change the structure of their loan from fixed to variable or otherwise? Have you, as part of your COVID package, reduced or eliminated those kinds of charges and fees associated with that?

Mr Comyn : There are a couple of elements to that. For us, and for all financial institutions, where customers want to break out of a fixed-rate contract and move to a variable rate, there's a cost associated with that. For us, we call that an early repayment adjustment. I think all banks have a similar sort of fee. There's no margin or profit on that break fee. It arises from the fact that, depending on the size of the loan and the term over which they are fixing, effectively we've entered into a hedge on the swap—or if you think about the interest rate curve—and we need to break that. So the cost can at times be substantial, as you've suggested $13,000 is. Specifically, a restructure is a specific term in banking and generally it would mean that a customer is in significant difficulty, so, if you're restructuring a loan, you could be looking at things like principal reduction, so reducing the loan that's outstanding from a customer. In those sorts of circumstances, it wouldn't be uncommon for us to wave an early repayment adjustment because we're making an assessment at that particular point in time that a customer is going to be unable to repay their loan and we may think that it's going to be serviceable or sustainable for them to repay a lower principal amount. In that case, whether we're reducing the loan amount or whether we're absorbing the cost ourselves on the early repayment adjustment is neither here nor there. We certainly haven't waived all early repayment adjustment fees, but there would be instances where we would have for customers in real financial difficulty.

Dr ALY: Is there a fee associated with depositing large amounts of money towards paying off a mortgage?

Mr Comyn : No. Generally you can make loans in advance of your repayment schedule. You can also hold additional funds in an offset account which reduces the loan balance. I think if you've got a fixed-rate facility maybe there's a provision. For us, it may be something like $50,000. There's a cap over and above the additional contributions. That's one of the ways many customers think about the repayment deferral at the moment: 'I'm not worried about paying extra interest over the life of the loan, because I'll just make additional repayments when I'm able to go back to work or when the economy recovers.' Given the long-dated nature of the contractual requirements on a home loan, customers are generally provided with a reasonable degree of flexibility.

Dr ALY: So if somebody were to put $20,000 towards their mortgage they wouldn't be charged for early loan repayment or for putting a big chunk on it?

Mr Comyn : No.

CHAIR: It's not like a car loan.

Dr ALY: Okay. Thank you.

Ms HAMMOND: A number of my questions have been covered, including by Dr Aly just then. I think you've covered the proposed solutions for people who can't pay. Do you think that responsible lending laws and practices are actually benefitting customers? Are they working to assist customers or not?

Mr Comyn : The essence of responsible lending is, of course, trying to minimise the chances of a customer taking out a loan that is unsuitable for them, and there are many different ways to look at that. From our perspective, it's never in a financial institution's interest to make a loan that the customer is unable to repay. The responsible lending obligations are designed to increase consumer protections by putting more onus on the lending institution to understand a customer's financial circumstances and to validate and verify all of their details. I think the design is sound. It becomes more a question of the trade-offs associated with that. But I think there's no question that, if you spoke to any of the consumer or customer advocate agencies, they would be strong advocates of the responsible lending laws.

Ms HAMMOND: How many people do you think are being locked out, though, because of the new responsible lending laws? Are there more people being locked out of potential loans than previously?

Mr Comyn : It's very hard to estimate. My overall view would be that there is an abundant supply of credit available in Australia, by international standards, in terms of borrowing capacities and what individuals and multiple parties can borrow against—housing. I don't think it's the source of the problem and I don't think it's the source of frustration, either, more broadly. Typically the frustration, to the extent that there is some, manifests around the time taken and perhaps the intrusiveness, from the customer's perspective, of the information that they're required to provide—the level of expense verification and interrogation. I think that is much more of a factor. If you were to talk to—and I have—significant property developers who are building new houses, they would say that customers are less certain about getting access to finance, particularly on a staged basis, because institutions now far more commonly have multiple additional steps, subject to valuations and verifications. Of course, you have to overlay that with a COVID environment, where there's a lot of economic uncertainty. All institutions, including the Commonwealth Bank, would be taking a more conservative view about people's income; we'd be discounting unstable sources of income. So I think there's both a separation between responsible lending per se as well as alongside the economic uncertainty that we're all experiencing as part of the pandemic.

Ms HAMMOND: Do you think there's a potential that they could work to disadvantage first-time borrowers, for example younger people entering into the housing market?

Mr Comyn : Potentially, yes. As lending standards have changed and evolved over time, we and a number of stakeholders are very conscious of access to the market for first home buyers. It's a very important segment for us. But there are requirements, and I think, broadly, those requirements, which have been in place for some time, particularly those around requiring a deposit and maximum loan-to-value ratios, have served the financial stability of Australia remarkably well. You look at parts of Europe and the US which got into great difficulties in the housing crisis post GFC. There were a number of cases where income wasn't validated or verified. People were being lent too much, the loan-to-value ratios, or the loan, were in excess of the value of the property which led to a lot of economic instability as well as great difficulties for the individual borrowers.

Ms HAMMOND: To what extent do you seek personal guarantees, particularly from young people, from family members or from others as a condition of providing people with loans?

Mr Comyn : I couldn't give you the specific proportion in terms of the number of home loans that we'd make where someone would offer a guarantee. Guarantees are a high-risk area from the bank's perspective. There have been examples in the past where people don't adequately understand the risks of providing the guarantee. We've definitely improved the process, the controls and the checks in place. Unfortunately, sometimes that can manifest itself where perhaps a parent may not have fully understood the documentation their child was providing to them and they don't understand the recourse that's available to an institution when you do provide a guarantee. I'd be happy to look into the exact numbers. I suspect it has reduced, and it's been an area of real focus for us and I think the broader industry over the last several years.

CHAIR: Sorry, Ms Hammond, can I just interrupt and ask a follow-up question to that because it's contextually relevant? Does the CBA have any data on young home mortgage applicants who get financial assistance from parents or other family members to support their deposit?

Mr Comyn : We would, Chair. It would probably understate the actual numbers. Sometimes you see survey data where people would say what proportion of their homes are being supported by the bank of mum and dad often or family members. Applicants may—obviously, we'd prefer they didn't—disclose their savings as opposed to a gift, but I suspect that parents or family members are helping a substantial proportion of new borrowers in the market at least at some point.

CHAIR: The data suggests that it's always underreported but, on notice, could you get us that data; and, for the secretary, could we ask that of all of the four major banks? Sorry, Ms Hammond.

Ms HAMMOND: That's quite okay, Chair. I'm just following up—I'm still on this line though—on the provision of guarantees et cetera or getting them from older members of the family. That is one area of potential elder abuse, isn't it?

Mr Comyn : Yes, it is.

Ms HAMMOND: You mentioned before that you take steps to assess whether elder abuse is actually happening. What are some of the steps that you put in place with regard to that?

Mr Comyn : Perhaps I'll let David talk specifically around broader elder abuse. There is a group of people, including the CEO of the Financial Counsellors Association, and we've had conversations around the provision of guarantees and what we've learnt. We've gone through those processes to make sure there are real checks and controls and that for any customer who's signing one, particularly one who may be more vulnerable, we are very comfortable and confident that they understand the full implications of the guarantee. But, as David explained earlier—and I'll let him expand—the work that we've been doing around elder abuse extends into scams and a whole range of different areas.

Mr Cohen : Good afternoon, Ms Hammond. I think the important point here is that elder abuse can occur in a number of ways. As you mentioned, there's the risk of an older member of the family being asked to provide a guarantee but then there's the broader aspect of financial abuse, for example, where family members coerce an older member to hand over their account details or force them to draw money. And then there are the scams: internet and phone scams. So what we've done, firstly, is we've rolled out training to over 20,000 of our people, particularly, our frontline people, to enable them to identify possible occasions of elder abuse—for example, when an older person comes into the branch accompanied by a younger family member and it appears that the younger family member is prodding or causing the older person to withdraw. But, in other respects, we've also taken steps to inform older members of the community about the risks. For example, we have produced a number of publications. Safe & Savvy is one of those publications. It's particularly aimed at helping older members of the community understand the risks of scams and cybercrime. We've held seminars in our branches—I think we've held over a thousand seminars—for our customers to take them through those risks. So we're doing quite a lot to try and educate those older members of the community and also to try and identify where scams or elder abuse might be happening and then step in and stop it.

Ms HAMMOND: Okay. Sticking to seniors for the moment, I've been approached by a number of seniors over the last year who've had great difficulty actually getting loans—I'm not saying from the Commonwealth Bank but just in general terms. Does the CBA offer reverse mortgages?

Mr Comyn : No, we do not.

Ms HAMMOND: Why don't you offer reverse mortgages?

Mr Comyn : It's a very good question. We did. We stopped offering them. We've looked at it. The reason we ceased was that we couldn't get comfortable with a process that adequately protected all parties. Even though we can see the merits of people being able to unlock equity and particularly to turn it into an income source, our experience had been that we'd just have seen too many examples where, sadly, after that customer may have passed the beneficiaries or family members would contest some of the documentation and whether the customer had entered into that facility and whether that was appropriate. At least at that point in time, we couldn't get comfortable, with the risk profile, that there wouldn't be any examples of customers getting a product that wasn't suited to them and that certainly their family members would believe wasn't suited to them. But, more broadly, I think it is actually quite a gap in the market, because I'm aware that a number of other financial institutions have largely reached the same conclusion.

Ms HAMMOND: Yes. I know you don't offer them, but can you give a reason as to why the rates on reverse mortgages are higher than others when you're taking out security? Do you have any explanation?

Mr Comyn : I can't easily. I don't know if there is a different capital regime. There would certainly be a different risk profile associated with them.

CHAIR: Pretty minimal risk, I would have thought.

Mr Comyn : Yes, as far as the repayment risk is concerned.

Ms HAMMOND: Yes. Moving on to a different topic, how many loans do you believe might now not be covered by adequate security? I'm talking particularly about housing loans.

Mr Comyn : When you say 'adequate security', do you mean the loan exceeds the value of the security?

Ms HAMMOND: Yes.

Mr Comyn : We would call that negative equity. I won't get the exact slide, but it's in our full-year results, probably about two-thirds of the way through. It would be about 3½ per cent, and, from memory, about 65 per cent of that would be related to Western Australia, where clearly over the last decade or so the asset prices and house prices have materially underperformed.

Ms HAMMOND: Yes. With all the issues happening with COVID, do you anticipate that you're going to have to exercise more of your security rights, such as foreclosure, or take any additional steps along those lines?

Mr Comyn : Well, it would depend. This period at the moment is critical to seeing how many customers are able to recommence their repayments. Ultimately, for the customers, particularly for the home that they live in—and we'll certainly do what we can to keep them in the home that they live in—provided that there's an adequate employment market, we remain confident about the outlook for housing and customers being able to re-establish themselves. The importance of reducing unemployment and increasing the number of jobs that are available, given we're going to be finishing the year at a much higher unemployment rate, is going to flow directly through to the proportion of customers who will struggle to make repayments—not at this stage, because customers who are in repayment deferrals are not in arrears and not in default. That process would otherwise take into 2021, generally speaking. But we noticed—and we disclosed this as part of our full-year results—that almost 70 per cent of the loans that are in repayment deferrals have a dynamic LVR less than 80 per cent, which means that at the last month, which is the last valuation, the loan doesn't exceed the value of the property.

Ms HAMMOND: Is it a standard practice of the bank, when SME loans are given, to take security over personal assets?

Mr Comyn : Certainly it is common practice for security to be involved in business lending—not always. Many of the facilities, in terms of working capital overdrafts, tend to be unsecured, but, if we look across our lending book, there is a high proportion of there being security. That ranges from residential security to commercial property security—and, in some cases, secured over particular assets such as equipment, vehicles et cetera.

Ms HAMMOND: Have you identified that as an area of greater risk at this stage for the bank?

Mr Comyn : The risk more precisely around property flows through into both the housing book as well as our commercial lending book. There's no escaping that. Fortunately there was a lot of diversification, particularly across commercial property, you'd appreciate—everything from small retail to commercial property. That can be anything from office to logistics or industrial if I look across our lending book in business. Agriculture, fortunately, is having a good year. In many parts of the country there has been much stronger rainfall, so we're seeing a much better outlook there, which is obviously very good news for our customers in regional areas.

Ms HAMMOND: I would like, if possible, to get some sort of statistics on the SME loans which are secured by homes.

Mr Comyn : Sure. No problem.

Ms HAMMOND: Thank you. My final question relates, I guess, to the bigger picture. I know the CBA has been investing in risk analysis. It is a two-pronged question. Where do you see green shoots? Where are the areas that we as a government could look at to promote the economy? Secondly, what are the areas that are dangerous at this stage? What are the areas that we need to keep a watchful eye on as having greater consequences on the economy going forward?

Mr Comyn : Perhaps I'll answer in a couple of ways. We believe that some of the sectors that are hardest hit are actually really important for Australia's long-term economic prosperity—clearly in and around tourism, education, accommodation. The services sector is extremely important. Over a more than 10-year time horizon, those sectors are going to be vital for Australia. They are also some of the sectors that are under the most pressure, clearly, given the lack of travel, the closure of borders, the lack of international travel, the lack of migration that's coming in. More than 80 per cent of people who arrive in Australia would then go into a rental property, so there is a real flow-through impact. There are many opportunities to invest in infrastructure, education, energy, transport, health care. I was talking a minute or two ago about agriculture. I think we should be very positive about agriculture over the long term in Australia, and at the moment in the near term as well. They're having a very good year. So I think there are a number of different sectors that are worthy of investment, and that sort of investment can be financed very cheaply and hopefully will be a source of many jobs, which will be vital at the moment.

Ms HAMMOND: In terms of investment in education, though, if the borders stay closed, isn't education linked to borders and international students?

Mr Comyn : In some ways it is. Clearly the foreign students have played a significant role, particularly for a number of the larger institutions in Australia. But education more broadly can flow through in many different ways. There was before COVID but arguably that has accelerated. In terms of greater skills and capabilities, there are going to be requirements for where there will be perhaps more limited opportunity, certainly in the near term for people to embark on greater skills, vocational training, microcredentialling. I know that there's a lot of focus domestically in some of those areas, as there is internationally.

Ms HAMMOND: Would there be any areas of manufacturing that you believe should be looked at?

Mr Comyn : Absolutely. I think there will be a degree of many companies looking at elements of their supply chains globally and I'm sure that's the case in Australia. We've already seen examples of companies moving some of their manufacturing back on shore. Even if in some circumstances that may result in a slightly higher unit cost, that actually more than offsets some of that security. In certain industries, at a national level but also in particular companies, there would be opportunities in more domestic manufacturing.

Ms HAMMOND: Thank you.

CHAIR: Dr Leigh.

Dr LEIGH: It has been reported that Piper Alderman is preparing to launch class action law suits against a number of banks, including the Commonwealth Bank, for payment of conflicted remuneration to financial advisers and that that will be bankrolled by a London based litigation funder, Woodsford. AMP chief executive Francesco De Ferrari told us in July that he was very concerned about the activities of litigation funders in Australia. Are you concerned that that class action would be funded by litigation funders?

Mr Comyn : As you said, there has been a significant increase in the number of class actions more recently. Specifically, I don’t know the funding arrangements. I do know that Piper Alderman commenced proceedings. We put out an ASX release in that regard yesterday. It relates to legacy conduct and one of our aligned financial advice businesses. But clearly class actions have risen substantially in recent times.

Mr Cohen : I think one aspect that is worth mentioning in terms of concerns would be the flow-on impact to the availability of directors' and officers' insurance. You may be aware there has been quite a reduction in capacity in the D&O market. As a result, it is getting harder for directors and officers to take out insurance. It seems to be very much linked to the proliferation of class actions, particularly around what they call 'securities class actions'—for a non-disclosure to the market. It certainly has that downside. That's not to say that class actions don't have their place. But I think we just have to be conscious of some of the impacts that are having an effect elsewhere.

Dr LEIGH: I'm not sure many of your customers would be that sympathetic if the cost of insurance is going up because more people are receiving the money to which they are entitled. How else—

Mr Cohen : I think it's a slightly broader issue, though, than just the cost. There is the cost of course, which ultimately is a cost that the company bears and therefore shareholders bear. But the other aspect that I think is a longer term issue for us all is that if D&O insurance is not available then good talent won't necessarily be attracted to board rooms and in the long-term that can't be a good thing.

Dr LEIGH: Is that a worse outcome than people who suffer harm from financial institutions not being able to get restitution because class actions can't get off the ground without litigation funding?

Mr Cohen : That goes to my point earlier. I think actually there is a place for class actions. It's not to say that class actions should be banned or anything like that. It's much more a case of ensuring that class actions that are taken are for a genuine purpose and that they don’t have unintended consequences. So I agree with you that where a financial institution has done the wrong thing and the customer has suffered, then clearly a class action is one of the appropriate vehicles to get compensation and restitution.

Dr LEIGH: Would you agree that a litigation funded class action can often be an appropriate way of ensuring proper restitution for wronged customers?

Mr Cohen : I think we have seen circumstance where that has happened. I guess the issue with funding more broadly is whether the amount actually received by customers who have been wronged is the appropriate amount when you compare it to the proportion received by the funder.

Dr LEIGH: The Reserve Bank's term funding facility is much more generous for instances in which you extend credit to businesses who have below $50 million in revenue—five times more generous, in fact. Has that led you to narrow the spreads on business lending to small business as distinct from the spreads in business lending to larger firms?

Mr Comyn : Specifically, we have a lot of focus on the SME sector in the context of both support and ensuring that we're facilitating them to grow and invest, hopefully, on the other side of the pandemic. Specifically, one example would be the SME loan guarantee, which we were offering at about 4½ per cent. That's a substantial narrowing of the spreads. I wouldn't necessarily tie the cause or rationale of that to the multiplier. We are certainly aware of the multiplier in the term funding facility. We think it is well designed and we think it is a good feature of the overall term funding facility provided by the Reserve Bank. It certainly creates incentives and aligns interest around supporting parts of the economy that are going to need that support the most.

Dr LEIGH: But why has large-business lending grown while small-business lending has shrunk eight per cent? Is this purely a demand problem or is there some bottleneck in the supply of affordable credit?

Mr Comyn : I think it's largely demand, and I think it differs across institutions. We saw an increase in institutional lending, particularly in the months of March and April. After May we've probably seen a net overall reduction. There's abundant liquidity and access to finance for institutions. Unlike in the GFC, there hasn't been a squeeze on liquidity. Global funding markets and domestic funding markets are functioning well. The Reserve Bank has clearly intervened to make sure that people have clear expectations about both the cost and the availability of credit there. We've seen an expansion in our small-business lending. I do think that there is lower demand for credit at the moment given the uncertainty of both the health and the economic outlook. But that's not to say that there aren't ways that we can improve both the access and the supply of business credit. We've recently improved one of our lending products, where we can make a decision and fund directly into a customer's account in less than 20 minutes for eligible customers. So I think it's an area where there could be continued innovation to make it easier and faster so that customers, particularly business customers, can access new funding. That's been an area of discussion by policymakers in the central bank for many years.

Dr LEIGH: In terms of innovation, the provision of small-business loans has been criticised by COSBOA's Peter Strong and by the Small Business and Family Enterprise Ombudsman, Kate Carnell. One of the proposals that is around is Bruce Chapman's proposal for a revenue-contingent loan, something like a HECS-style loan, to small business. Do you see that as being an innovative model that might have a greater degree of take-up among small businesses?

Mr Comyn : I'm not specifically aware of the loan you're referring to in any detail. I'd be happy to look at it. I think there is a place for both speedy decisions and faster turnaround times of lending and different security types, so less reliance on property in particular. That's a particular area of interest for us. I spoke to the head of COSBOA six or so months ago, but I'm not specifically aware of that. But I'd be happy to look at it.

Dr LEIGH: You have recently taken a share in the global buy-now pay-later firm Klarna, which is much bigger globally than Afterpay. It has about 90 million users globally compared to 10 million. You've integrated Klarna into your banking app. What has prompted you to move into the buy-now pay-later space? Specifically, what share of Klarna's revenues come from late fees?

Mr Comyn : On the second question, I could happily get the number for you both domestically and globally. It has actually been a focus for Klarna globally. They have, I think, a much lower proportion of late penalty fees, and they're acutely aware of that, but I'd be happy to get that for you separately. Yes, we own just over five per cent of Klarna globally. We're working closely with them domestically. We are much smaller than some of the established buy-now pay-later players who've been in this market for much longer. Clearly, we saw a strategic gap or opportunity there, with the growth of buy-now pay-later. It has certainly well exceeded our expectations from many years ago. We could see the customer demand and the feedback on the experience, so it's an area of the market in which we chose to participate. We also see that payments innovation is going to be one of the most important areas of financial services globally, so we see our investment in Klarna as being more than buy-now pay-later or pay-in-full. We see it much more about working closely with them, exclusively in Australia and New Zealand, to develop innovative payment experiences to benefit our customers.

Dr LEIGH: The industry makes a lot of money out of its merchant fees. I understand it's something in the order of five to six per cent, compared to the typical one or two per cent from credit cards. Do you think that's going to be sustainable in the medium term?

Mr Comyn : No, I don't. If you think about credit cards, the central bank and the governor have understandably been very focused on making sure that payments are low cost in Australia and it's a low cost of doing business for small businesses. For credit cards, as you mentioned, interchange has actually come down to 50 basis points on credit. That would be about a fifth of interchange in the US, which has clearly weakened the proposition for credit cards, but it gives you the overall trajectory of interchange and the cost to small business. What I think the buy-now pay-later sector has done well and successfully is convince customers who are paying substantially more than that, as you suggested, that they're getting more than just the payment. They're providing an acquisition channel for new customers; they're helping to increase basket size—a whole range of different features and benefits. So I think it has certainly been an interesting evolution, particularly in terms of the businesses that are effectively funding the buy-now pay-later opportunity for customers; whereas, obviously, the credit card was funded directly out of a combination of interchange and the interest on outstanding balances.

Dr LEIGH: To an economist like me, the model seems fragile. It seems premised on the fact that Amazon is actually a pretty hopeless shopping experience if you don't know what you are looking for, and Google Shopping tends to be pretty badly organised if you want to know the final cost. These buy-now pay-later operators seem to be exploiting an information asymmetry in the market that's surely got to be temporary. So, given that—that you see this as enduring rather than ephemeral—I'm surprised that you're piling on big to Klarna.

Mr Comyn : I certainly see some aspects, and there have been a number of players, but clearly the largest in Australia is Afterpay. They've built a very large business domestically, which is valued at, I think, more than $20 billion, and the features that they've built have resonated with customers. Now, as to whether that continues to be the same offering as today, like you, I certainly see the potential for that offering to be competed away or to evolve, but, in and around payments, as an experience, it's going to be one of the most important services that we provide for customers. I think it's the area of greatest innovation internationally, and the pandemic has actually provided a real accelerant to that as more and more people have moved some of their purchasing behaviours online and e-commerce has accelerated quite dramatically. There are a whole range of players in and around that value chain, from shopping carts to merchant acquirers to buy-now pay-laters, that have seen substantial increases in their valuation over that time, and that's an area of real focus and importance to us.

Dr LEIGH: It's interesting. Thank you very much.

CHAIR: Mr Comyn, I'll pick up where the deputy chair just asked around merchant facilities, and we've asked, extensively, questions on notice on those matters, previously, as you're aware. How do you see the progress of moving small-business customers towards lowest-cost routing options compared to higher-cost options, which may be more remuneratively in the interests of CBA but may not work to the interests of small-business customers?

Mr Comyn : Specifically, I see the progress of take-up among our customers to least-cost routing, which is what you're referring to, as very slow and probably insufficient progress.

CHAIR: What can you do about it?

Mr Comyn : We've written out to more than 50,000 customers. We've made 3½ thousand calls, to give you an example. This is in the last month. The take-up so far has been very modest. There is, unfortunately, a lot of complexity in the way pricing is designed for merchant acquiring. Least-cost routing applies to some customers but not to all. If you're in a bundled plan or a simple merchant plan, it doesn't apply. Many customers, understandably, find the prospect of trying to work out the price point by which they want to, ultimately, determine which transactions are routed to EFTPOS versus a scheme, which depends on transaction size, a mix of card type—from our perspective, we think we need to do more in this area. We're also giving broader thought to our overall pricing, going to market in full merchant acquiring, because, understandably, this has become an area of real focus and, in some ways, frustration, and I don't think it's having the desired effect. I don't believe that we're motivated commercially to be slowing any progress. I don't feel that the solution we've put forward to date has been satisfactory. So we're going to be very focused on improving that between now and the next time we meet.

CHAIR: Good. I would like to see that continue. I know that that's an interest to the government, because it has such a direct impact on small businesses who, as we've discussed extensively today, may be in a situation where they find themselves needing every bit of saving, depending on the nature of their business, as a consequence. I know we've raised that topic with you previously.

I want to go to some of the issues that were raised by Mr Kelly in his discussions with Mr Elliott, from the ANZ, around super and housing. We've discussed a little bit of it so far. Just for clarity, if somebody takes out money from their superannuation account, from early release, and uses that money—$10,000 in each financial year so, at this point, a maximum of $20,000—towards a house deposit, as long as they can demonstrate a capacity to finance their mortgage it increases or improves the chance of them being able to buy their own home if they use a CBA mortgage facility. Is that correct?

Mr Comyn : Yes.

CHAIR: If there were further iterations of that, if they continued to save that money, it would increase the chances of younger Australians being able to buy their own home using CBA mortgage facilities. Is that correct?

Mr Comyn : Yes, that's correct. It would, of course, have a reduction on their projected retirement outcomes from reducing their superannuation balances, but, yes.

Dr ALY: Can I seek a further clarification on that though?

CHAIR: Yes.

Dr ALY: Would that mean they wouldn't have to provide a record of being able to save? Let's say they saved up 20 per cent of their deposit and the rest they got from accessing their super. Would you still consider their ability or record in saving and consider that the majority of their deposit was taken out of their super?

Mr Comyn : They would need both the deposit and the evidence that they were able to have saved—in the same way that if someone gifts a borrower, it's not the same as them having saved the money for themselves.

CHAIR: But a critical part of it would be their capacity to finance the debt, surely, from—

Mr Comyn : Yes, I mean income service stability is the critical element.

CHAIR: Just for clarity, also, what's the current rate that superannuation is paid by the Commonwealth Bank of Australia to its employees?

Mr Comyn : It's 9½ per cent.

CHAIR: Which is consistent with the law. If it were to increase, in terms of the compulsory super guaranteed by law, would that be an extra cost on the business?

Mr Comyn : Yes.

CHAIR: Would it therefore mean that it would cost more to hire labour?

Mr Comyn : The costs of that labour would increase, so, yes.

CHAIR: In a period in which there is obviously a challenge around jobs growth, even at the start you said that in this financial year and towards the end of the calendar year you're projecting the unemployment rate to be somewhere around nine per cent to 10 per cent, if you increase the cost of labour, that would slow the number of people who return to work because the cost of labour would increase for businesses.

Mr Comyn : Yes, that's possible. There are benefits and costs on both sides, Chair.

CHAIR: But, in terms of the short term benefit, which is getting Australians back into jobs, which means they're, ironically, contributing to their superannuation account—whereas when you're not working you're not contributing to your superannuation account—if you increase the cost of labour, it would slow jobs growth.

Mr Comyn : I think the No. 1 challenge facing Australia will be the creation of jobs.

CHAIR: Yes, and so anything you do in terms of increasing costs of labour would therefore slow that and have the dual impact of increasing the number of people working but also, ironically, harming the retirement savings of individual Australians, because they wouldn't be employed. That's a logical—

Mr Comyn : Yes, I'd accept that. You could also make an opposing argument, but personally I would prioritise jobs creation and growth as the No. 1 issue facing the Australian economy. Of course, there are real costs and benefits from Australia's superannuation system and the future benefits that that delivers for everyone that participates in that, as well as potentially increasing those. The manner of those increases is a matter for the government.

CHAIR: If you said that there's a benefit that's greater than that, then why don't you pay your staff more than 9.5 per cent of superannuation?

Mr Comyn : Why don't we?

CHAIR: Yes.

Mr Comyn : Because, like most employers, we align with what's required of us, which is 9½ per cent.

CHAIR: So the benefit is there, but it's not so great that somehow CBA sees that it's necessary to contribute further. It's a recognition that, if that's the standard, then we will meet the standard but otherwise we recognise that it would otherwise come at the expense of jobs to contribute more towards it.

Mr Comyn : I'm not sure you can frame it entirely that way, but, yes, individuals are able to contribute additional amounts to their own superannuation up until the contributions cap.

CHAIR: Of course. That's the beauty of the freedom to choose in a free society rather than having the government compel you to do things, but I will leave my Milton Friedman books in my office for the moment.

Dr ALY: That's a good idea, Chair. Let's do that.

CHAIR: I think, Mr Comyn, you've added valuable insight into that. There's a lot of academic discussion, but, when it gets down to the business of it, businesses make choices because of what they can reasonably afford and because of the economic impacts. We have a lot of businesses—small, medium and large—that we need to be able to employ people at this time. That's why getting lower cost routing is important, because it saves costs on small businesses and then—

Dr LEIGH: Are you—

Dr ALY: Chair—

CHAIR: I'm just asking a question.

Dr ALY: This is not a question.

Dr LEIGH: This is a 90 second statement.

CHAIR: Last time I checked, I was the chair.

Dr ALY: It doesn't matter.

CHAIR: The same is also true in terms of superannuation.

Dr ALY: Last time I checked, this was a democracy.

CHAIR: One of the other things that matters is competition. I'm curious, Mr Comyn, in terms of banks and competition, it's obviously a competitive market you operate in, not just with your own business but against domestic banks and international banks and the increasing presence of non-bank lenders as well as online banks. Where do you see competition in the banking sector at the moment?

Mr Comyn : In terms of relative intensity in past eras or—

CHAIR: Intensity and where you see it going in the medium term.

Mr Comyn : It will continue to increase. There are more participants, as you said, coming from a combination. I think there has been more banking licences handed out over the last 18 months than over the last 10 years. There are a number of policies, specifically able to facilitate competition, like open banking and the consumer data right. There is no question in my mind that there will be greater competition. I think that is good news for customers. That means we will continue to improve the quality of our service, products and pricing.

CHAIR: Do you have a concern that the competition in the market will see such spread in terms of financial products that it would create issues for existing banks and their viability not just yours—I think you're fine—but smaller banks?

Mr Comyn : I think the economic situation, particularly low interest rates, probably is a greater threat to more financial institutions insofar as not so much necessarily solvency but certainly return profile. If you look at the challenges of a very low interest rate, which is—we are where we are. I think it's entirely appropriate that the rates are where they are, and they're going to be where they are for many years to come. But it creates enormous challenges for a financial sector because of the compression in net interest margins. You've seen that with the latest bank results. Most banks are struggling to make returns equal to their cost of capital, and some of the smaller banks are earning substantially less than their cost of capital, which is not a great thing overall for the banking sector, because banks need to be able to generate returns above their cost of capital to be able to continue to lend, otherwise they have to keep going to the market, raising capital, and that's exactly what's happened in Europe.

CHAIR: We started, pretty much, talking about where you saw the economy going in the shorter medium term. Obviously, the government's support mechanisms are a big part of what will happen with households, aggregate demand and the like. If I recall correctly, the CEO of ANZ said that they saw the bottom of the current situation we face in terms of GDP as being towards the end of the year. On your economic modelling, where do you see the bottom?

Mr Comyn : At the end of this calendar year in terms of GDP, probably peak unemployment we certainly hope. In terms of the flow through into the banking sector probably mid next year in terms of what we would call risk-weighted asset migration, or changes in stress profiles, across our customer base. So I think calendar 2021 will also be a difficult year.

CHAIR: So concurrently, I presume, with what you're projecting in terms of what is likely to be the most difficult time in the housing market, which is the middle of next year.

Mr Comyn : Yes, potentially, subject to a number of different factors such as health, borders, economy et cetera.

CHAIR: Of course, but that's the fair assumption.

Mr Comyn : Yes.

CHAIR: Thank you. We do have many other things we're going to ask, but I'm going to absolve you of that responsibility. That just might mean we get you back some time—not soon but within a reasonable period.

Dr LEIGH: On time, rather than delayed three months, would be fine with me.

CHAIR: Oh, don't be a worrywart! We had to make sure that the banks could support the Australian economy, and they've done that, although we will scrutinising them. Of course, committee members reserve the right not just in those three months but continue to reserve the right to submit questions on notice, because I know how much the banks enjoy receiving them. Just nod, Mr Comyn. I'm being my usual cheeky self.

Dr ALY: You don't say.

CHAIR: I will now conclude the hearing. I thank you both for your participation this afternoon. Can I have a resolution that the committee authorise publication, including publication on the parliamentary database, of the transcript of the evidence given before it in public hearing today.

Dr LEIGH: So moved.

CHAIR: So moved, by the deputy chair. We have found an ecumenical spirit after all.

Dr LEIGH: Of course!

CHAIR: I declare this public hearing closed.

Resolved that these proceedings be published.

Committee adjourned at 16:17