ANZ insider describes Bonus Bonds as massive 'rort'

Bonus Bonds' investors forgo interest in the hopes of winning a monthly prize draw. Photo/Janna Dixon

ANZ-managed Bonus Bonds are in the sights of the financial watchdog as it looks at legacy products that may no longer be suitable for investors.

The Financial Markets Authority says it found issues with legacy products as part of its conduct and culture review of the banks and will be looking further at the issue as part of the new conduct licensing regime announced by the Government last week.

The FMA's response came after the Herald queried the regulator over complaints and concerns about Bonus Bonus after revealing an ANZ staffer had written to the bank's chief executive and board concerned about the product and calling it the "biggest rort in financial services in New Zealand" and asking for the fees to be cut.

A spokesman for the FMA said it had received four anonymous complaints in the last five years regarding ANZ's Bonus Bonds.

"These complaints raised a number of issues but were primarily around the reasonableness of fees charged as part of the scheme."

He said the Bonus Bond fees were disclosed in the product disclosure statement but noted they were historically higher than similar investment products in other retail managed funds or KiwiSaver schemes.

"While KiwiSaver funds must meet an unreasonable fees test set out in the legislation, there is no such obligation in respect of the reasonableness of fees for managed investment scheme investments."

The spokesman said during its conduct and culture reviews last year it raised the issue of legacy products that were potentially low value for customers and asked all providers to review legacy products with that in mind.

"As part of the extended financial conduct regulatory regime the government has proposed, which will focus on the fair treatment of customers, we expect to look further at the issue of legacy products that may no longer be suitable for investors."

ANZ cut the fees on Bonus Bonds in July from 1.15 per cent to 0.88 per cent but said it made the decision to do so before receiving the anonymous letter from the employee.

There is around $3.25 billion invested in Bonus Bonds which is managed by ANZ Investment Services - a subsidiary of ANZ bank.

Instead of getting interest on their investments savers go into a monthly draw to win a prize of up to $1 million but the odds of winning a prize are low and have been getting worse.

The latest annual report says the average odds were one in 32,294 of winning a prize in any given month, down from one in 26,875 in its 2018 financial year.

The Herald was given a copy of the employee's letter which was sent in July to acting ANZ New Zealand chief executive Antonia Watson as well as the board of the ANZ and the chairs and chief executives BNZ, ASB, Westpac and Kiwibank.

In it, the worker who described themselves as a "loyal ANZ employee" said they had "listened with incredulity and a degree of anger" to comments made by Watson at the Financial Services Law Conference about her focus on fair customer outcomes.

"How can you say that with a straight face while you are a director of the company that operates Bonus Bonds?"

"You simply must know that our $40 million fee under Bonus Bonds is widely viewed both within and outside ANZ as the biggest ongoing financial services rort in New Zealand."

Antonia Watson, acting chief executive of ANZ New Zealand. Photo/Supplied

The person said ANZ had already made hundreds of millions of dollars from Bonus Bonds but urged the bank to reduce the fees.

"On behalf of more than one million Kiwi mums and dad I respectfully request that you reduce the fees to an amount similar to a KiwiSaver cash fund. Please do this by the end of this month."

Bonus Bonds' annual report shows ANZ Investment Services dropped its management fee on the product by 28 basis points from 1.15 per cent to 0.87 per cent from July 1.

A spokesman for the ANZ said the pricing change was approved on June 28, before it received the letter on July 11.

Unlike changes to its interest rates and other fees the bank didn't release a public notice about the change.

The ANZ spokesman said the price change was made public in its annual report and product disclosure statement and customers were notified of the documents being released and encouraged to read them.

The employee also questioned a change to the Bonus Bonds product disclosure statement last year in which the bank removed a figure which disclosed its investment management cost as 0.02 per cent of the total 1.28 per cent fee at the time.

"You must know that we can't get away with this for much longer. I worry that this might be the last straw for our industry," the employee wrote.

The ANZ spokesman said the figure was removed following a review of the expenses being charged to the scheme.

"From 1 April 2018 ANZ stopped seeking reimbursement for investment management costs. Therefore, there was no longer any investment management cost to disclose."

He said the investment management charge that was 0.02 per cent now formed part of the total fee.

"It does not represent the total cost to ANZ for running Bonus Bonds. Other costs include branch and contact centre staff time serving customers, operations teams, centralised teams such as finance, risk, legal and product management, developing and maintaining the registry systems and online channels and managing the monthly prize draw."

In the year to March 31, 2019, it earned $40.8 million in fees and charges down from $43.8m in the prior year.

ANZ charges 0.39 per cent of funds under management to manage its KiwiSaver cash fund which invests largely in bank deposits.

Asked why the fees for Bonus Bonds were so much higher the ANZ spokesman said Bonus Bonds was a unique product with significant differences to KiwiSaver, which means pricing will be different.

"For example, Bonus Bonds does not charge a membership fee, the investment is not locked in and returns are distributed through a prize draw."

ANZ has been under pressure this year after it chief executive David Hisco left the bank in June in the wake of an expenses scandal.