The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia has attracted worldwide publicity for all the wrong reasons. As Tom Ravlic reports, the cards sector is not immune
The Commonwealth Bank of Australia (CBA) has been under fire during evidence at the Financial Services Royal Commission (FSRC) for increasing credit card limits on accounts held by a customer who told the bank of gambling problems.
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A case study presented to the FSRC, which was called on 30 November 2017 by Prime Minister Malcolm Turnbull, featured details about the ease with which a bank customer, David James Harris, obtained credit from the CBA despite self-identifying as a problem gambler.
Harris, 30, is one of a number of bank customers that have been called to provide evidence to the Royal Commission, which was called in part to expose the underbelly of the sales culture, compliance failures and poor governance practices of the financial services sector in Australia.
Consumer pressure
Turnbull was forced to call the full-blown inquiry into bad banking behaviours as a result of increasing pressures placed on him by consumer groups, members of Commonwealth parliamentary committees, and financial services institutions.
“Those institutions are the bedrock of the economy. There would be very few Australians who are not a customer or shareholder of the banks. Many of us are both, with almost every worker holding bank shares through their superannuation fund. The banks employ more than 200,000 people alone,” the besieged Turnbull told the assembled Canberra press corps on 30 November 2017.
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By GlobalData“Now, the speculation about an inquiry cannot go on. It is moving into dangerous territory where some of the proposals being put forward have the potential seriously to damage some of our most important institutions.”
Turnbull announced the appointment of Royal Commissioner Kenneth Hayne the day after the media release and press conference announcing the inquiry, with Hayne and his commission team required to report back to the government by February 2019.
The terms of reference require the Royal Commission to produce a report that looks at the full extent of the behaviour of banks and other institutions, and provide recommendations. These can include recommendations for legislative change as well as any instances of further investigation that might be required.
The terms of reference acknowledge, however, that Australia’s financial system is robust and the inquiry was to investigate a broad range of misconduct.
CBA under fire
The commission has heard evidence from customers about the provision of inappropriate advice related to the provision of financial products, including credit cards.
Counsel assisting the commission, Rowena Orr QC, told the commissioner that Harris’s CBA experience was one example of the provision of an inappropriate product to an individual that had warned the bank of a personal problem.
“Mr Harris had a gambling problem of which CBA was aware, at least when credit limit increases were offered, and perhaps ought to have been aware earlier,” Orr told the commissioner.
“Nevertheless, Mr Harris was offered a credit limit increase only days after telling the Commonwealth Bank of his problem.”
Gambling on credit
Harris’s written statement contains further details of his dealings with the CBA, which had given him a series of increases in credit despite being aware he had a serious gambling problem.
He told the commission that he had applied for a credit card with a A$10,000 ($7,600) limit in 2014 in preparation for a trip overseas. Harris was planning a trip to visit the UK, as well as stopping over in Thailand for dental surgery.
While he says he repaid the credit balance soon after returning to Australia, Harris began to gamble using his credit card.
“I had gambled previously, but not to that degree, and I had previously only used my own money to gamble. I began using the First CSA Credit Card to pay for my gambling expenses,” Harris explained in his written statement to commission.
“Initially, I was transferring cash from the First CSA Credit Card to another one of my CSA accounts using the cash advance function before using it to gamble.”
Harris developed a habit for “maxing out” his first CBA credit card on gambling. He admitted that he applied for a second credit card for gambling purposes that had a A$7,000 credit limit.
Harris also managed to get a third credit card with an A$8,000 credit limit. The CBA also offered Harris a credit increase on his first card, which meant the available credit across his three credit cards was A$27,100.
The problem gambler told the commission that he continued his habit of reaching maximum credit on one card and then trying to pay it off with the other cards. This had serious consequences for Harris’s work and social life.
“I was only able to continue paying off the credit card because I was working for extended periods. In the first half of 2016, I worked for 62 days in a row before taking one day off. I then worked another 40 days in a row,” Harris admitted.
“I did this because the debt hanging over my head was overwhelming. I was struggling with depression and anxiety. My social life had been destroyed and I wanted to get the debt paid off so that I could close the card.”
He continued to receive offers from the bank stating he was eligible for an increase in credit, which he accepted. At one point his credit limit was increased to A$35,100. This kept fuelling Harris’s gambling addiction.
“By way of example, from Friday 9 June 2017 to Sunday 11 June, I charged at least A$18,850 to the Consolidated CBA Credit Card in order to gamble,” Harris noted.
Complaints
Harris made two complaints about his situation, and ended up receiving assistance from the bank to make arrangements allowing him to repay the debt owing on the cards.
He told the commission in his written submission dated 18 March 2018 that he still owed A$23,400 to the CBA, while also admitting that he had “gambled hundreds of thousands of dollars”.
The CBA appeared after Harris and the bank’s executive, Clive van Horen, told the commission that Harris should never have received increases in credit given his gambling addiction. Bank procedures related to assessing customers for credit purposes had changed over the past 12 months.
“[We’ve] acknowledged we should not have provided that final credit limit offer. The basis for saying that is, having had the conversation with one of our staff members in a contact centre and declaring that Mr Harris had a gambling problem – to use the simple description of it – without in any way trying to minimise the challenge that presented, that information was not in any way passed through to credit-decisioning systems,” Van Horen told the commission.
“That’s a failing, and we acknowledge that and we’ve got to find ways to address that. So, to that extent, having declared it to somebody working in the Commonwealth Bank, we did not use that information for the subsequent credit offer.”
Changes in the CBA’s internal processes had begun over the past 12 months in order to ensure that any signs of gambling by a bank customer with a credit card could result in them being banned from getting a credit increase.
Van Horen told the commission that, while the law did not appear to require the additional monitoring of how customers used credit, he believed it was reasonable for banks to look more closely at how customers with credit limits spend those funds.
“In April last year we changed our credit-decisioning rules such that if we observed high levels of gambling spend in a customer’s credit card, we would not offer them any further credit limit increases,” Van Horen observed.
“That was a change that happened in April last year, which in isolation should have meant we wouldn’t offer significant [credit lending increases] to customers who exhibited high gambling spend on their credit card.”
Australia’s Slippery Slope
The bank, however, admitted to a challenge. Gambling is legal, Van Horen noted, and at what point should a bank decide to intervene?
“You can quickly see the slippery slope that puts us on if we say you can’t spend on gambling: what about other addictive spending – on shopping, or on alcohol, or any other causes?” he said. “This is what we’ve grappled with. Absent any clear legal or regulatory guideline, how do we determine when we intervene and impose limits?”
One of the other challenges faced by the CBA is that its internal systems failed to provide information to people selling the idea of credit increases to someone like Harris that there were financial or other problems that had come to the bank’s attention. Put simply, the right hand at the CBA did not necessarily know what the left hand was doing.
“We need to build a flag. There are complexities around all that, but we need to find a way to make sure that if somebody – and you will appreciate there’s a lot of people out there – has a conversation that flags a customer could be in difficulty, in the way of other flags for domestic violence, where we then trigger domestic violence support programs,” van Horen explained.
“We don’t have something that triggers a proactive action around a self-disclosed matter like this. It’s something we want to do something about; we’ve got to work out how we can do that, because it’s clearly not a simple thing to execute.”
Van Horen told the commission that details of Harris’s personal circumstances collected by a person on the bank’s customer hotline should have been recorded in some form so anyone dealing with him was able to see personal information that would them stop people from sending out letters of offer to increase their credit limit.
“We absolutely acknowledge we shouldn’t have [sent out other offers to increase the credit limit] – in a perfect world we would have used this information from the telephone call to find its way back into our credit models.”
The credit card calamities faced by Harris are not the only problems faced by the CBA at the Royal Commission or with other regulators. A recent inquiry by the Australian Prudential Regulation Authority found that the CBA’s board of directors had failed to do its job properly in overseeing the conduct of management in multiple areas.
