Regulators frisking ME Bank after redraw bungle

Speaking to the House of Representatives standing committee on economics on Wednesday, ASIC Commissioner Sean Hughes said the matter “could have and should have been handled better”.

“For the avoidance of all doubt, ASIC did not endorse ME Bank’s remediation or communication plan, nor has it sought to do so,” Mr Hughes said.

But the commissioner added he was not yet in a position to say if ME had broken the law, as its inquiries into the bank are ongoing.

Similarly, APRA deputy chair John Lonsdale, said the his body was looking at “particularly at operational issues as they arise and risk governance framework issues”, whereas ASIC is focused on customer remediation.

Both ASIC and APRA are set to stay in talks over the bank’s blunder. 

Last month, the committee scrutinised ME Bank on changes it made to its redraw facility in March. The redraw product allows customers to make payments towards their home loans ahead of their payment schedules, with the funds also being available to withdraw. 

A public outcry ensued after ME reduced redraw limits – reducing the amount of cash available to customers as the coronavirus crisis hit the Australian economy. ME Bank then reversed the changes for customers who asked for it – chief executive James McPhee told the committee around 20 per cent of the affected customers asked for the readjustment. 

Liberal MP and chair of the standing committee on economics Tim Wilson had called the latest hearing on Wednesday, after ASIC contradicted statements made by ME Bank around its redraw issue.

Around 21,000 “amber” status customers had been affected, each with around $17,500 on average in reduction on redraws– around $367 million in total. Mr Wilson asked if the total would affect to the bank’s capital, to which Mr McPhee said he would take that question on notice.

“I would have thought if you’re going to need an additional $367 million available for your customers… that would probably have an impact on your capital holding,” Mr Wilson said.  

The bank has been aware of an issue with its redraw facility since at least 2013, when it first reported it to ASIC. An error in ME Bank’s legacy core bank platform (Ultracs) saw the amount available for redraw on the home loan was incorrectly notified.

For customers affected, if they accessed the full redraw, their loan balance would be placed above the amortisation curve – leaving them to either experience an unexpected uplift in repayments amounts later in their loan term or a balloon repayment at the end of term.  

Affected loans were split into two categories: red, where 416 mortgages already had loan balances above the amortisation curve and amber, 6,554 loans where a full redraw of available funds would place the customer above the amortisation curve. 

The solution was meant to be a migration of the loans from Ultracs onto a new banking platform T24, which was scheduled in 2014. Until then ME Bank used a manual process, where each month the bank would manually monitor, recalculate and load into Ultracs the correct “available funds”. 

But due to system issues and complexities with the T24 platform, ME Bank’s home loan portfolio was not migrated and the manual control remained. 

ASIC was then notified again of the redraw issue on 10 December, where the bank admitted its manual control had been compromised and the error had begun to occur again in 2015 – but it had not realised until October 2019.

The redraw changes in March were the bank’s attempts to amend the error. ASIC had told it beforehand in a meeting in December that there would be “particular sensitivities around reducing access to funds to which customers had through they were entitled”, Mr Hughes’ opening statement to the committee said.

Mr McPhee told the committee that ME Bank had commenced its communications after the changes had been made, as a “conscious decision” made by a dedicated subcommittee, with letters and phone calls to affected customers staggered over time. However, he admitted the process had been wrong.

“The intent of what the bank was trying to do was to make sure that customers who hadn’t fully drawn on their redraw wouldn’t inadvertently redraw over their amortisation schedule,” he said.

The communications process, where it has been calling red status customers is still ongoing, while Mr McPhee confirmed approximately all amber customers have been contacted.

“It was ASIC’s expectation that ME Bank would communicate with their customers in a clear and transparent manner before making any adjustments to redraw facilities,” Mr Hughes said.

“This should have occurred in any normal setting, but in this instance there should have been heightened awareness and sensitivity to explain to customers what was happening with their account balances and why, given the strained economic environment impacting households.

“This has been a disappointing experience for ME Bank and has had an avoidable impact on customer confidence.”

According to ASIC, AFCA has received roughly 80 complaints about the redraw issue.

Mr McPhee also revealed to the committee that KPMG reviewed the bank in 2015 for a potential sale, after LEK Consulting conducted a review in 2008.