The Commonwealth Bank’s processes to assess whether a customer could afford overdraft facilities on their savings accounts were “doomed to fail”, the banking royal commission has heard.
The royal commission on Tuesday turned to hearing about breaches of responsible lending laws at CBA in regards to offering consumers overdraft facilities, a type of small loan that consumers can draw down on if there is not enough money in their bank account to make a payment.
A massive computer glitch inside CBA resulted in nearly 10,000 customers receiving overdraft facilities they were not able to service without causing serious financial hardship. CBA introduced an automated decision-making process for overdraft products in 2011.
In 2015, the bank identified two separate but related computer glitches which meant that when a bank staff member entered a customer’s rental and living expenses, the automated system read those entries as “zero dollars”.
Counsel assisting the inquiry, Albert Dinelli, spent the morning questioning CBA executive general manager of retail products, Clive van Horen, about the bank’s breaches of responsible lending laws as a result of the process problems.
“What you would concede is that process fell short of what was required?” Mr Dinelli asked.
“Absolutely. That insertion was not a deliberate insertion,” Mr van Horen said, referring to the computer glitches that listed rental and living expenses as "zero".
Mr Dinelli dug into why the bank did not pick up on the error when designing the automated process.
“The criticism is not made of the insertion … it’s the process that was from July 2011, without overstating it, was doomed to fail because of these two relevant questions not being considered, wasn’t it?” Mr Dinelli asked.
“It certainly failed,” Mr van Horen replied.
The automated process covered more than 300,000 overdraft facilities, the commission heard.
The commission also heard that CBA was first alerted to issues within its automated decision-making processes for overdraft facilities in mid-2014 when it was contacted by consumer rights group the Consumer Action Law Centre.
Mr van Horen said the bank then conducted a review and found there were issues in the short-form application process for the facilities.
A short-form application allows a customer to apply for an overdraft by giving only key information including income and living expenses. The bank also used long-form applications for some customers, which included a more detailed breakdown of expenses, income and debts.
Mr van Horen said a new manager, who he did not name, took over the department that covered the overdraft facilities in mid-2015 and launched a full review of the products. It was through that review that the bank in September 2015 found the problems in the short-form process were mirrored in the long-form applications.
CBA also used only a limited benchmark to assess expenses that took into account only essential basic expenses based on the national median. The benchmark included no allocation for discretionary expenses, the commission heard. Mr van Horen said the bank now used a benchmark that incorporated a small amount of discretionary expenses.
The commission heard CBA did not tell the corporate regulator of its four-year breach until November 2015. Banks are required to notify the regulator of a significant breach within 10 days.
When asked why CBA did not report the breach sooner, Mr van Horen said the bank had legal advice that it was not required to tell ASIC within 10 days because the breach was of consumer credit laws and not the Corporations Act.
CBA was hit with four separate infringement notices from the Australian Securities and Investments Commission over its breaches in relation to the overdraft facility computer errors.It was fined $180,000 and forced to write off $2.5 million in unserviceable overdraft loans.
Later on Tuesday, the commission expects to hear from executives from ANZ in regards to that bank’s breaches in regards to its unsolicited overdraft facility marketing campaign and other alleged breaches of processes included the bank’s overcharging of interest rates to some home loan customers.Originally published on smh.com.au as ''Doomed to fail': CBA's 10,000 inappropriate loans'.This article was published by: http://www.watoday.com.au/
Author: Sarah Danckert