It’s not a great time to be running a bank. Interest rates are at record lows, putting significant pressure on margins, at a time when costs are rising as a result of increased regulatory action.
Mr Hartzer told shareholders that the bank has plenty of “outstanding issues” to deal with before it can effectively get back to business.
“In recent years a number of issues have emerged relating to past business practices, operational errors, gaps in compliance, or changes in regulation,” the Westpac CEO said.
“These were identified through the royal commission, our CGA self-assessment, ongoing product reviews, and various regulatory actions. The faster we resolve these issues, the sooner we can refocus investment and management attention on delivering more for customers, thereby increasing the value of our franchise.
“The most significant change over the year was the exit of our financial planning business and reducing our operating divisions from five to four.”
Mr Hartzer noted that Westpac’s financial planning business had been loss-making for some time. Exiting the business came with an immediate shutdown cost, but this will be quickly offset by cost savings and reduced risk, he said.
Westpac’s remaining Insurance, Superannuation, Investments, Platforms and Private Wealth businesses have been integrated into its Consumer and Business divisions.
Customer remediation was another area of focus for the bank in financial year 2019.
“Over the course of the year we continued to work through a backlog of historical issues in our financial planning and banking businesses and we continue to work with regulators to agree on a fair and reasonable approach to remediation,” Mr Hartzer said. “The most significant of these issues is the so-called ‘fee for no service’ issue in financial planning.”
Mr Hartzer highlighted that Westpac’s remediation program for wealth customers has been made more complex by its aligned advisers, who operated separately under Westpac’s licence.
“This was a standard industry practice, where companies like BT provided licensing and back-office services to planning groups. In these cases, we face significant logistical challenges in obtaining and checking all the historical files of those non-Westpac advisers, particularly if they have left the industry,” he said.
The future doesn’t look much brighter for Westpac, at least over the next 12 months. Mr Hartzer said the year ahead will continue to be challenging, from multiple perspectives – economic, competitive, legal, reputational, and regulatory.
“Regulatory actions – flowing from the royal commission and other industry reviews and investigations – will continue to require significant investment and management attention,” he explained.
“Regulators have substantially stepped up their resources and enforcement activity, leading to a dramatic increase in our own costs as we respond to the various enquiries, make improvements in our non-financial risk and control environment, and deal with the consequences – including fines and other legal fees – related to any adverse findings.
“In addition, regulators in Australia and New Zealand have a number of reviews underway, in many areas including home loan pricing, remuneration, and capital/risk-weighted asset methodologies across the sector. Further clarity on these reviews is expected in the year ahead.”