What have we learned?

The royal commission spent a considerable amount of time asking Shayne Elliott, the chief executive of ANZ, about ANZ’s remuneration regime.

It’s clear that remuneration and incentive schemes will feature heavily in the commission’s final report.

Every CEO we’ve heard from so far has admitted that if incentives aren’t aligned properly, they can create exceptionally bad outcomes by encouraging bank staff to chase profits at the expense of customers.

Hayne will understand he has the opportunity to recommend a once-in-a-generation overhaul of remuneration regimes. The banks may even appreciate someone like Hayne coming over the top to force change on the industry – given their concern about the first-mover problem they all face as oligopolists? [Yeah, nah].

Anyway, Elliott, for his part, said ANZ does not name individual executives who’ve had their bonuses cut for poor performance, and it doesn’t want shareholders to know the specific detail, because it doesn’t want to demotivate executives or create a “culture of fear” within ANZ.

Elliott says he’s a little frustrated with the way shareholders are exploiting the “two-strikes” rule in AGMs. He says they’re using it as a protest vote for things that have little to do with executive performance.

We also heard the last of AMP’s acting chief executive, Mike Wilkins. His evidence didn’t fill AMP’s shareholders with confidence. AMP’s share price has lost 3.3% today

Wilkins stubbornly defended AMP’s “vertical integration” model – the business model that has corrupted Australia’s financial industry in recent decades. Despite all the criticism from the royal commission, and the corporate regulator, about vertical integration, Wilkins reckons it is serving AMP well.

Thanks for joining me today. And thanks again to the Guardian’s team, particularly Martin Farrer.

We only have two days left in this round of hearings.

Until tomorrow.

The day has finished off with Orr asking questions about ANZ’s response to the Sedgwick review.

Elliot will be back tomorrow at 10am, so we’ll hear more from him then.

Stay with me? I’ll gather my thoughts for a wrap of the day’s proceedings.

Interesting.

Orr wants to know if ANZ has a clawback mechanism to reclaim remuneration after it has been paid to its Australia and New Zealand executives.

Elliott: “So I would have to get some advice on this. My recollection is that in practice we do not. Now, whether it’s legally it’s somewhere in the deed …”

Orr: “Are you aware that the panel that conducted the prudential inquiry into CBA recommended that CBA move to introduce the potential for clawback in respect of serious misconduct?

Elliott: “Yes, I am.”

Orr rounds out this line of questioning by asking Elliott about his own remuneration.

Orr: “We know why your variable remuneration has been reduced, Mr Elliott.

“You tell us in your statement that it has been reduced on account of conduct issues raised in the royal commission and consequent reputational damage?

Elliott: “Yes.

Orr: “And I just want to complete this questioning and ask you to reflect on what the difference is between publication of the consequences for you and publication of the consequences for your senior executives?

Elliott: “Well, it’s a simplistic answer but I am the chief executive. I’m the ultimate accountable person beside our board for this. I have a higher degree of responsibility and accountability than anybody else in the company. What comes along with that is more public scrutiny and involvement in, in this case acquiring of shareholder approval. I think that’s entirely appropriate. Could it go deeper in the organisation? That’s open to discussion. But I think I am – it is different for the chief executive.”

Orr: “How much was your variable remuneration reduced by?”

Elliott: “My variable remuneration in total again was reduced – I think it was 23% year on year, if I’m not mistaken, or something like that.

Orr: “It looked to us as though it was reduced to 75% of your short-term target and 83% of your long-term target. Is that right?

Elliott: “So that’s versus target but I didn’t receive a target last year … so year on year the blend was down, I think, 23%.”

Elliott says another reason individual executive compensation should not be published regularly is because it can lead to pay inflation across the industry.

Elliott: “I think it’s a reasonably well accepted – it may not be – but reasonably well accepted view that actually the regime of disclosing senior executive compensation has actually led to inflation in executive compensation.”

Commissioner Hayne: “Well, there’s an inevitable arm’s race aspect to it?”

Elliott: “Correct.”

Elliott doesn’t want to be explicit about why ANZ executives have had their bonuses cut because he doesn’t want to create a “culture of fear”.

Orr: “Can I suggest to you that it’s not so much about a public shaming; it’s just a part of holding them accountable?

Elliott: “Again, with respect, I understand the attraction of that. I am suggesting there are risks with that approach that I think outweigh the benefits.”

What are the risks?

Elliott:

We run an organisation that is large. I have 40,000 people who come to work every day at ANZ in 33 countries. They have all sorts of backgrounds. They are all sorts of circumstances, beliefs, religions, ethnicity, etcetera. For me to be able to confidently assess that I can nail that communication and it not to be understood that it not to create a culture of fear, I think would be extraordinarily difficult. And I believe that we can do that in more general communication, rather than, to your suggestion, of essentially publishing performance assessments of the most senior executives of this company.”

The royal commission is spending so much time looking at the remuneration regimes in Australia’s banks.

Do you think it’s a safe bet that Hayne’s final report will contain recommendations on remuneration that won’t be welcomed by bank executives?

An entire global industry has built up around executive pay, with the accompanying growth in vested interests. The gravy train is long and sweet.

Orr wonders why ANZ doesn’t send internal communications to its staff to tell them why specific executives had their bonuses cut.

Elliott says it would be demotivating for ANZ’s executives.

Orr: “Why not, within ANZ, send a message to your staff by identifying the people who have been the subject to remuneration consequences for risk reasons?

Elliott: “I understand the attraction of that idea. However, going back to something we talked about before, we’re here to manage the company for the long term. I would hope that it’s understood that implicit in our decisions is my decision that they are the right executives to build the company for the long term. So I wish to retain their engagement and their motivation. That does not mean I do not hold them accountable when things have gone wrong. But I think some sort of ritualistic public shaming of individuals would be of little value and, in fact, potentially significantly negative consequence in terms of attracting, retaining, motivating the very best people for the future.”

Elliott tries to explain himself.

I think in the remuneration report from the directors, they do refer – I would have to refresh my memory – but they do talk about the generic decisions they’ve made about how they come to determine the appropriate [bonus] pool and ranking for people.

“I think they even talked about – and they will talk about it later – had applied downward adjustment to equity that had previously been awarded to previous executives.

“So they talk in general terms but not in specific.

“I accept that on reading the annual report it would be difficult, if not – well – impossible, for anybody to determine why an executive received what they did, whether that was below, at or above target. There is no subjective description of that for them.

“For myself, it’s slightly different, in the sense that while it may not be in the formal report, there is dedicated, deliberate time at an AGM where my own remuneration or parts of it have to be approved and there is generally a discussion at – of my performance, if you will – on those factors at that time.

“But the others, you are correct.”

Orr wants to know why more detail isn’t included in the remuneration report. “Wouldn’t it be a powerful way, Mr Elliott, to admonish your senior executives for failings in relation to risk, compliance or conduct, to identify those remuneration consequences that had been taken in response to those failings publicly?”

Elliot: “It might be. I think we would have to consider unintended consequences, procedural fairness, etc.”

ANZ shareholders kept in dark

There’s a long discussion about the reasons why, for the 2018 financial year, there were four instances of a current or former ANZ senior executive suffering a cut in their variable remuneration for reasons relating to risk, conduct or compliance.

It turns out ANZ shareholders have been kept in the dark about the details.

Elliott was one of the executives who had his pay cut. The other three executives had their variable pay slashed due to issues with risk management.

Elliot says the pay was cut for the three executives in recognition of the fact that ANZ had not met the standards it had set itself for risk management, some of which has actually been publicly discussed at the Royal Commission.

Elliott: “So, for example, the failure to remediate issues on time would be a good example. That was taken into account. As a result of that, those executives received ... less than their target remuneration.”

But the exact figures are subject to a non-publication order - so we don’t know what they are.

Elliott says they are in ANZ’s remuneration report, but Orr says that’s not the case.

Orr: “We’re told that they’re not and that was the basis of the application for a non-publication direction, Mr Elliott. I do want to take that up with you. Do you say that someone reading the remuneration report in your annual report can see that each of those three individuals had their variable remuneration reduced - not just reduced but reduced because of risk, compliance or conduct reasons?”

Elliott: “No, they cannot.”

Orr: “And why not?”

Elliott: “Well, that’s a good question. I can say it’s not market practice. I’m not sure that’s a terrific answer but it hasn’t been.”

Elliott expresses frustration with the “two strikes rule.”

He concedes individual shareholders have very little say in how a large publicly-listed company is run, despite theoretically being part owners of the company.

He says a consequence of them having so few avenues to express their views on a company’s performance is, when they are asked to vote on executive remuneration, via the two-strikes rule, they often take the opportunity to express opinions on all matter of issues.

Elliott: “My views are probably not terribly educated. I do have views. I am concerned that shareholders today, irrespective of their size, have very few avenues for expressing their perspectives to a company. The remuneration report is one of the few avenues given to them. And understandably, I think we’ve seen shareholders use that to have a voice on other issues.”

Orr: “Concerned?

Elliott: “Well, I’m not sure it’s being used for the purpose it was meant. I think the purpose was to talk about remuneration. People use it understandably to express views on all sorts of things to do with the company because they have no other real significant ways or any powerful ways - I mean, the good thing about the two strikes rule, it inevitably has power to it. If you second strike, there is an outcome, as opposed to opposition to general issues that are voted on at an AGM.

“So I am concerned that it is used for incorrect purposes, if you will. But I think it is shareholders expressing the need to be heard as well.”

Orr wants to know significant the expectations of shareholders are in setting remuneration structures for executives.

Elliott says they have a “very significant” voice, given their ability to vote on particular issues around remuneration means.

He argues they have the most significant voice.

Elliott: “I can’t put a number or percentage on it but it is a very, very significant voice. Perhaps the strongest of all. I am struggling to think of a stakeholder group that has anywhere near the influence on remuneration structures ... as to the actual absolute amounts for some like myself as a chief executive.”

Orr talks about the remuneration regime for ANZ’s senior executives.

She wants to know if there has been an “incorrect calibration” - to use Elliott’s euphemism - of senior executive pay.

Elliott says there has.

Orr: “In your submissions in response to the interim report you’ve said that, or ANZ said that, as a generalisation over a number of years, and due to various events, the financial services industry has developed a culture that has become overly focused on revenue and sales?

Elliott: “Yes.

Orr: “And this was a point I took up with you earlier today. And also in those submissions, that in cases where ANZ had engaged in problematic conduct, there was often a focus on achieving certain short-term financial objectives, including financial objectives at the expense of the longer term matters?

Elliott: “Yes.

Orr: “And ANZ acknowledges that its remuneration and incentive structures have at times not adequately discouraged and may even have encouraged poor conduct. Is that right?

Elliott: “Yes.

Orr moves on to remuneration, and how it can encourage misconduct.

Orr: “Could each of those steps have been taken much earlier than following the Commission’s inquiry into these matters in the fourth round of hearings?

Elliott: “Of course.

Orr: “And why weren’t they, Mr Elliott?

Elliot: “Because they didn’t receive sufficient attention.”

Orr: “Now, since that round of hearings, ANZ has taken several steps directed to assisting Aboriginal and Torres Strait Islander customers living in regional and remote locations?

Elliott: “Yes.

Orr: “You’ve now committed to working with indigenous leaders to rework your security questions for customers who need to verify their identity over the phone?

Elliott: “I believe so, yes.

Orr: “And you’ve decided to offer a telephone service staffed by employees with special training in assisting Aboriginal and Torres Strait Islander customers?

Elliott: “Yes.”

Orr: “You’ve also now decided to cease providing informal overdraft facilities on transaction accounts that you detect are in receipt of certain Centrelink benefits? And the effect will be that from the end of this month, certain Centrelink recipients, as identified by your systems, will be unable to unintentionally overdraw their transaction accounts except in very limited circumstances?

Elliott: “That’s my understanding, yes.

Orr: “And why have you taken that step?

Elliott: “Well, I think it was a recognition that our services had the potential to cause unintended harm to customers who, perhaps, were not as familiar as they could be in terms of how to responsibly use those products. And so while there was no ill intent as far as I can determine, we felt it better to put these safety mitigants in place, if you will, to try to ameliorate that risk.

Orr: “And also since that round of hearings you’ve committed to cease charging dishonour fees on pensioner advantage accounts?

Elliot: “Yes.”

Elliott had told colleagues of his, before the fourth round of hearings, to tell him how many ANZ outlets service communities of people that predominantly rely on Centrelink payments.

About 40 outlets meet that definition.

Elliot wanted to be on standby for any remediation issues that could arise from the royal commission’s investigation into those communities.

Elliott takes Orr through the steps again about the economics of ANZ’s branch network.

Orr then asks Elliott why ANZ was so concerned about being prepared for the fourth round of hearings, which were held in late June and early July.

That round of hearings focused on issues affecting Australians who live in remote and regional communities, farming finance, and interactions between Aboriginal and Torres Strait Islander people and financial services entities.

The royal commission has heard shocking evidence of financial advisers employed by Australia’s major banks deliberately targeting Indigenous communities with poor levels of financial literacy.

The fourth round of hearings showed major failings by banks with regards to meeting basic banking needs of indigenous customers.

Elliott says ANZ knew it was going to be the subject of two cases studies during that round, one involving Landmark, the other involving the poor experiences of indigenous customers (where it took ANZ four months to open the correct basic bank account for one customer).

Elliott: “Both issues were likely to be difficult because we knew we had failings in both areas. We knew that both areas were highly and understandably emotional for customers and the community.”

We’re back after lunch.

Senior counsel assisting the royal commission Rowena Orr QC is asking ANZ’s chief executive Shayne Elliott about his bank’s decision to close scores of bank branches around Australia.

But with that we have broken for lunch.

The hearing will resume at 2pm.

Elliott insists that ANZ thinks seriously about its branch closures, taking things on a case-by-case basis.

He agrees there have been some cases where ANZ’s decision to close a branch has led to the final branch in a regional community shutting down.

Orr wants to know if people still go into branches to discuss significant things like home loans.

Elliott says they do, but for ANZ’s home loan book less than a third of home loans are originated through a branch – 55% come through brokers, another roughly 15% come through ANZ’s mobile banking network.

“So the branch network is not a terribly efficient or .. well-used avenue for home loans,” he says.

He said ANZ has two types of customers who come into its branches – consumer retail customers and small business customers.

“The last report that I saw from our network was that retail traffic, the number of people coming in and the number of things they do when they are there, is falling. I can’t remember the exact numbers but from recollection it’s close to, perhaps, 10% per annum.

“Small business usage remains reasonably solid, so it’s not shrinking.”

Interesting.

As part of ANZ’s attempt to ensure Neave remains independent they’ve put him on a fixed three-year term which won’t be renewed.

He’s only being paid a base salary, which is fixed. There won’t be any variable remuneration.

What, no bonus!? But how could you expect him to do the job he’s been employed to do if he doesn’t get a bonus? He’ll be impossible to motivate.

There has been a long discussion about ANZ’s “customer fairness adviser”.

In December 2016, ANZ appointed Colin Neave as ANZ’s customer fairness adviser with particular focus on remediation. Neave is a former commonwealth ombudsman.

Neave’s role is to advise on customer remediation.

Elliott says Neave has contributed greatly to internal discussions about what to do with customers who use ANZ products that end up causing them harm.

Consider the use of credit cards for gambling.

Elliott says many people use credit cards perfectly responsible, and ANZ respects peoples’ individual choices and rights, but it also believes it has a responsibility to customers who can get into trouble.

He says with regard to the use of credit cards for gaming, ANZ has changed a number of things: (1) how ANZ deals with people who have got themselves into difficulty and how it can put “speed bumps” along the way that make it more difficult for people to use those products irresponsibly.

Orr: “What sort of speed bumps are you thinking of, Mr Elliott?”

Elliott: “So, for example, to suggest - and it is difficult because we are talking about individual rights here - while you may be able to use our products at a gaming venue, we don’t want to see people use the maximum credit limits.

“We want to always have people have some ability and flex left in their cash flow for normal expenses. So we will put essentially a sub-limit in on a card.

“If I’ve got a $5,000 limit in general - I am making this up here but hypothetically, maybe I can only use $4,000. Once I hit $4,000 I could not use that product for gaming purposes beyond there. Things like that.”

Orr: “So is that something that you are considering as a way forward?

Elliott: “We are actually doing that. Yes.

Orr: “And have you commenced implementing that?

Elliott: “We are - we have to amend the terms and conditions of our products to allow us to do that with our customers.”

And again on AMP, the sharp fall in the shares follows a release to the stock market confirming the figures revealed by Wilkins yesterday that the cost of fixing the company’s rep will be a hefty $778m.

Here is that statement to the ASX.

And just to follow up on the AMP shares post, this is a chart showing how the stock has performed in the past 12 months.

They touched a high of $5.245 in early March but the commencement of the royal commission that month has seen a steady decline set in. They have now more than halved in value.

For added perspective, the ASX200 is off 0.2% today. Shares in ANZ are down 0.26% and NAB is down 0.2%. Commonwealth Bank and Westpac are both up slightly.

Elliott’s performance so far has been reasonable.

It stands in severe contrast to Ken Henry’s, the chairman of NAB, who spent yesterday slouched in his chair, deigning to answer Orr’s questions when he thought they were worth responding to.

It will be fascinating to see what Hayne says about Henry in the final report.

Orr: “So where does customer remediation sit now on your list of priorities for the application of your resources?”

Elliott: “I don’t have a list of priorities that numbers them one through 10 or something. I have a group that are all important. Remediation is there. If we were to speak to our team who run the Australia business, of which this refers to, they would tell you - and they have - and it’s documented - that remediation is their number one priority as a team. If I look at our board - and I believe it’s documented in the minutes - have encouraged or ... demanded that remediation deserves to be a top priority of the organisation.”

She wants to know why ANZ has previously described customer remediation as a “distraction”.

Asic uncovered an internal ANZ document in which a staff member said the bank put less focus on customer remediation – it was seen as a distraction, at the expense of earning revenue, and therefore not always given the highest priority.

Elliott said that was not an official view from ANZ. It was a mid-level executive who jotted down some thoughts ahead of ANZ’s attempt to recalibrate its approach to remediation this year.

Elliott: “It’s not an official analysis, it’s a person’s perspective. It’s a valid perspective but I think that’s what it is and I think it is important to note.”

Orr: “Can I start by asking whether you agree with that perspective?

Elliott: “Well, I think there are elements with that. I take this person at their word. There will have been an element of that, most certainly. Whether it was widespread, whether it was the norm at ANZ, I don’t believe so.”

Orr takes Elliott to the final finding in the ASIC report.

Asic found it took the major financial groups an average of 251 days to make the first payment to customers affected by a significant breach after the end of the investigation.

It took ANZ an average of 198 days [woo hoo it’s not the worst for once].

Orr flays him anyway, and rightly.

Orr: “Now, again, is that too long, Mr Elliott?

Elliott: “Yes. Absolutely.”

Orr: “And why has it taken ANZ so long to remediate customers?”

Elliott: “My investigation into this, and discussion with our teams has been - and this was a mistake on our part so I accept this was wrong – we had a culture of before we started remediating any customers we wanted to have total knowledge of the full extent of who exactly should be remediated and so there was a desire for exactness and completeness before we even commenced remediation.

“That was a cultural norm, if you will, within the company. It’s wrong. It’s flawed.

“And so what we have done now, with our remediation team, is we’ve adopted new principles and a new way of thinking about that which essentially says once we have sufficient knowledge where we can determine remediation even for a small number of customers, a cohort, we should start. So we don’t need to wait until we have 100% knowledge. We should start and do it in tranches and get going. We’ve already adopted that approach. It’s already having an impact in terms of our timelines. And it’s now something that we monitor.”

Orr takes Elliott to a second finding in ASIC’s report that it took the major financial groups an average of 150 days after commencing an investigation to lodge a breach report.

There is a legal obligation under section 912D of the Corporations Act to report significant breaches within 10 days of becoming aware of the breach.

Orr: “ANZ was an outlier on this front. Do you agree, Mr Elliott?”

Elliott: “Yes, I do.”

The other major banks took an average of 104 days for CBA, 139 days for NAB, and 165 days for Westpac between commencing the investigation and lodging a breach report.

It took ANZ 213 days.

Orr: “Would you still today be unable to look beyond seven years to see how many customers had been affected?”

Elliott: “Not in all cases.”

Elliott tries to offer an explanation, saying ANZ’s business was extremely complicated with different lines of reporting and oversight.

He says changes have been made, but he can’t say how long it will now take to identify a breach and report it to Asic. He would hope it could be significantly lower than 1,500 days.

Orr reads a case study from Asic’s report that involved ANZ.

Asic found ANZ could not advise when one particular significant breach started, despite having conducted investigations for almost two years and identifying historical concerns with fee disclosure on some types of credit and debit cards.

The availability of ANZ’s data meant it could only identify instances that had occurred in the previous seven years (which totalled around $7m in overcharged fees for customers). As a result, the remediation was limited to the identified $7m over charged. Further investigation of unavailable data may have revealed a greater impact.

Orr: “Do you have any observations about how it could come to the point where an investigation had been conducted for almost two years which had found that customers had been overcharged around $7m but ANZ still couldn’t identify when the breach had started or whether this was the entirety of the amount that had been overcharged?”

Elliott: “The difficulty here was going back further into history where the data was unavailable. Therefore, it was impossible for us to try to reconstruct that data. We accept that the concerns or the fee issues may have actually predated the seven years. It’s really a technical inability to go and discover that.”

It takes ANZ over four years to identify an incident that’s later determined to be a significant breach

Orr takes Elliott to an ASIC report on the breach reporting practices of Australia’s major banks.

It found Australian financial services licensees took, on average, 1,517 days to identify an incident that was later determined to be a significant breach.

Orr: “And that number of days, 1,517 days, also happened to be the average time it took ANZ to do that. Is that right?”

Elliott: “I believe so, yes.

Orr: “So, on average, it has taken ANZ more than four years to identify an incident that’s later determined to be a significant breach?

Elliott: “Yes.

Orr: “Now, can I ask you what your observations are about that finding, more than four years to identify an incident?-

Elliott: “Well, I mean, it’s clearly unacceptable and it’s not right.”

ANZ has already acknowledged to the royal commission that it has engaged in a range of misconduct and conduct that fell below community standards and expectations.

In submissions to the commission the bank has blamed a culture that has become overly focused on revenue and sales.

Elliott has been CEO and executive director of ANZ since 1 January 2016.

Since last year he has also been the chairman of the Australian Banking Association.

He joined ANZ in June 2009 and has held a variety of roles within the bank, including as global managing director of its institutional business unit, and as chief financial officer.

Before joining ANZ he held senior positions in two other financial institutions –Citigroup and a large investment bank in the Middle East.

Shayne Elliott, the ANZ chief executive, is now in the witness box.

Senior counsel assisting the royal commission Rowena Orr QC is leading the questions.

Wilkins is very defensive about AMP’s vertically-integrated model.

The commissioner, Kenneth Hayne, isn’t buying it.

Hodge wants to know if an AMP customer can have any confidence that they will receive good advice from an AMP-aligned financial adviser, and whether they will receive compensation if the advice turns out to be terrible.

He notes that yesterday AMP agreed it had set aside $460m to pay customers who had been hit by AMP’s fee-for-no-service scandal.

Wilkins tries to reassure customers that they can still trust AMP.

At any rate, that marks the end of Wilkins’ evidence.

Shayne Elliott, the chief executive of ANZ, is up next.

In recent years, the banks repeatedly claimed that their financial advisers were acting in their customers’ best interests by selling them products that just happened to originate from the very banks for which the advisers worked.

And why wouldn’t an AMP-aligned financial adviser advise a customer to buy AMP’s products? AMP’s products are superior to its competitor’s products!

Well, the financial advice industry has proved so profitable for everybody involved – the banks, the advisers – that the number of advisers has exploded.

The royal commission was told in April that since the global financial crisis the number of advisers has grown from roughly 18,000 in late 2009 to now 25,386 – an increase of 41%.

Just 8,704 of all financial advisers – or 35% – have completed a degree at bachelor level or above.

Hodge lays out AMP’s vertically integrated model.

He says AMP customers are channelled through various distribution networks, with the main distribution channel being “advice” – via either direct or aligned financial advisers.

AMP has data on what percentage of their customers choose AMP’s own products.

The percentage is high for customers who use platforms and then it goes down through funds, risk and bank.

Hodge has a document showing there’s a $370m margin share. He wants to know what that means.

Wilkins: “That is a payment that comes from the manufacturing units to the advice unit recognising the access to all of those forms advice in terms of the product flows that potentially come to AMP.”

Hodge: “Tell me if I’m right about this. Is it the case that $330m in commissions is paid by the products over to advice?”

Wilkins: “Yes.

Hodge: “And $370m is the amount of the margin that these AMP products make from the customers that is then shared back to the advisers?”

Wilkins: “Yes.”

A huge flow of funds comes from customers who’ve been sent by AMP-aligned advisers. The funds are sent to AMP Capital, and the majority of those funds are distributed out to other fund managers and AMP products.

Howard-McDonald warned in her memorandum:

As a business, we talk often about the value of a vertically integrated business but in practice my feeling is that we have little organisational understanding of what this means in terms of customer and other stakeholder expectations.

Further, on a day-to-day basis we operate as broadly four separate business lines who happen to share the same name and spend a lot of time doing business with each other, sometimes to the detriment of customer outcomes.

Hodge asks Mike Wilkins if he shares the view that AMP’s understanding of vertical integration is problematic.

Wilkins: “No, I don’t.”

Hodge then asks: “I think it fair to say you haven’t given up on vertical integration?”

Wilkins: “No.”

Hodge: “And for AMP, at least as it stands, vertical integration is pretty fundamental to the business?”

Wilkins: “We believe in vertical integration. We think it’s an appropriate structure that does have benefits for the consumer as well.”

The senior counsel assisting the royal commission Michael Hodge QC asks Mike Wilkins about a document Wilkins was handed by AMP’s customer advocate, Melanie Howard-McDonald.

Howard-McDonald’s role was to deal with customer complaints on a day-to-day basis.

She wrote the document at Wilkins’ request. He’d wanted to know her thoughts about a prudential inquiry into Commonwealth Bank. He’d asked the top 100 leaders of AMP to do that same thing but not everybody responded to his request.

Howard-McDonald’s views were passed to AMP’s board, which used them to develop AMP’s response to the CBA inquiry.

She saw serious problems with AMP’s vertically integrated model.

Wilkins says he disagreed with her views about vertical integration.

Reminder:

The “vertical integration” business model has received serious criticism from the royal commission this year.

The banks discovered long ago it was highly profitable to sell their customers financial advice and financial products. If they could charge customers for financial advice, and if that “advice” consisted of purchasing their financial products, then they would enjoy a profitable feedback loop. The business model was called “vertical integration”.

This year the corporate regulator published a report scrutinising the practice, called “Vertically integrated institutions and conflicts of interest”.

It looked at the quality of financial advice being offered by the two largest financial advice licensees owned or controlled by the Commonwealth Bank, ANZ Banking Group, Westpac, National Australia Bank and AMP.

It found their financial advisers had failed to comply with the best interests of customers in 75% of advice files reviewed.

It concluded there was an “inherent” conflict of interest arising from banks providing personal financial advice to retail clients while also selling them financial products.

Good morning, everyone.

Thanks for joining Guardian Australia’s blog of the banking royal commission.

We’re back today with Mike Wilkins, the acting chief executive of AMP. After Wilkins is finished we’ll hear from ANZ’s chief executive, Shayne Elliott.

AMP had another terrible day in the witness box yesterday but it’s share price was hardly affected. I guess it’s all relative. AMP’s shareholders are used to worse news.