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BFCSA: 'Stop being bastards': how the royal commission could reform banks

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'Stop being bastards': how the royal commission could reform banks

Sydney Morning Herald 22 September 2018 12:00am

Jessica Irvine

 

Graeme Samuel is in no mood for beating around the bush.

Australia’s former competition tsar, now a professorial fellow at Monash Business School, recalls a meeting with bank executives, in which they quizzed him on how to stop the relentless public mantra of “banks are bastards”.

“The first thing I said was: ‘stop being bastards’,” Samuel told Fairfax Media this week, reflecting on six sensational rounds of public hearings of the royal commission into misconduct in the financial services sector which, he says, revealed “horrific” case studies and examples of “crass stupidity” by executives.

“Some of us who have been in public service and dealing with these companies look at it and say what is going on?”

Earlier this year, Samuel was part of a high level trio – including the former head of the banking regulator John Laker and decorated businesswoman Jillian Broadbent – who produced a damning report on the Commonwealth Bank’s myriad recent failures, finding financial success had “dulled the senses” at Australia’s biggest bank.

But even Samuel is shocked at the extent of misconduct “endemic” in Australia’s financial services sector: “I didn’t think it was as bad as what has been revealed,” he says.

It’s a sentiment echoed by Bernie Ripoll, the former Labor politician who chaired a 2009 inquiry into the future of financial advice. “It has been an exhausting exercise having to digest so much deliberate misconduct to just rip people off,” says Ripoll. “I think it shows a level of corrupt behaviour that’s just unacceptable.”

Explosive examples of that behaviour have included cash-stuffed envelopes passing over bank counters in massive fraud operations, deliberate lying to regulators, doctoring of 'independent reports', the widespread charging of ‘fees for no service’, inappropriate lending to vulnerable consumers – not to mention the fee pillaging of the estates of the dead.

Commissioner Kenneth Hayne now has until the end of this month to deliver his interim report on the first four rounds of hearings – into consumer lending, financial advice, small business and regional lending - to the government. One more fortnight of public hearings will be held in November to assess “policy reforms”, when bank CEOs are expected to be finally hauled into the witness box.

Analysts at Citibank have called it “Judgement Day”.

After 12 weeks of hearings, more than 120 witnesses and almost 9000 public submissions, Haynes must now deliver his first verdict on what criminal and civil findings of misconduct may be found against financial institutions, along with his policy recommendations to stamp out such behaviour.

With several industries – including aged care and energy - now staring down the barrel of royal commissions, Samuel says the Hayne Commission has already delivered a “wake-up call” to corporate Australia which, he says, must take ultimate responsibility for changing its toxic culture of “complacency”.

“The importance of the royal commission is to shock business out of their complacency. No industry with public interest considerations ought now to consider itself exempt or secure from a detailed inquiry of some form or another. The fundamental lesson to boards, to senior managers and to middle managers is you might be next to have to sit before a Senate inquiry or royal commission to answer questions under oath.”

As to policy remedies, Samuel says suggestions by senior counsels assisting, Rowena Orr and Michael Hodge, of potential criminal and civil findings suggest a regulator missing in action.

“What that’s really saying is that the laws are there to have been broken. The problem is no one’s prosecuting them, no one’s bringing them to account. That tells me there’s a fundamental cultural challenge at the regulator.”

Samuel is scathing of relevant regulators, including the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority, for whom he conducted his inquiry. “We need tough cops,” he says. “The regulators have got to be totally feared, for their independence, their rigor, their commitment and their intolerance to bad behaviour, and they have not been feared for that – neither ASIC nor APRA.”

Samuel’s predecessor at the competition watchdog, Allan Fels, is similarly damning of ASIC’s role: “From my point of view, it has been failing for 20 years and I have no reason to believe it’s going to get better.”

Some within ASIC fear the regulator will emerge as the ultimate whipping boy of the commission, which – being of a legal mind – may give higher weight to recommending more criminal prosecutions as a deterrent to bad behaviour, rather than reforms to abolish underlying incentive structures which drive bad behaviour, such as conflicted remuneration.

Fels wants radical action on this front, too: “The depth and severity of the problems uncovered point to the need for deeper solutions – solutions that address serious conflicts of interest.”

As first revealed earlier this year by Fairfax, Fels still wants structural separation of banks from their financial advisory arms – a move which all big banks, excluding Westpac, have announced they intend to pursue - amid revelations of the deep conflicts that arise from having an issuer of financial products also purporting to provide independent advice about which products clients should buy.

Fels says the industry has demonstrated it cannot be trusted to clean up its own act: “The whole system of remuneration needs review and the answers are not simple. I think probably the best way forward is to have an independent Productivity Commission inquiry."

Banks' compensation schemes for customers they have wronged also require reform, says Fels: "It’s pretty clear that when things go wrong, the banks don’t have very good schemes, remedies and repayments and compensation. I would suggest that more needs to be done. It can’t be left in the hands of banks.”

On lending standards, many expect the commission will recommend that the tougher “best interests” test that applies to financial advice be extended to mortgage brokers. The thorny issue of commissions paid by lenders to mortgage brokers will also be scrutinised, with ASIC finding such fees encourage mortgage brokers to issue bigger loans than otherwise.

On insurance, the exemption of claims handling processes from some consumer protection laws is also likely to be revisited. Penalties for companies who fail to notify the regulator of breaches of the law are also likely to rise, from just $50,000 now.

Finance sector executives may also face stricter penalties. The government has already introduced a new “Banking Executive Accountability Regime”, which includes provision for the deferral of bonuses. Currently, it only deals with bad behaviour that threatens ‘prudential stability’. This could be extended to also cover misconduct, and the regime could also be extended to all financial services executives, not just banks.

At the end of the day, Samuel says ultimate responsibility for reforming bad bank cultures lies with executives, overseen by their boards: “It’s the work of boards and chairs and CEOs, and if they don’t feel up to it, they have got to really consider their positions.”

Samuel says chairpersons must do more to reform the “male club” culture of company boards and recruit more talented women.

Heads have already begun to roll, most sensationally at AMP, but also at NAB, which this week announced the most senior banking executive to so far front the commission, NAB’s Andrew Hagger, will head for the exits.

From now, it is Commissioner Hayne who will come under the public spotlight, to see if he can come up with the solutions needed to restore broken trust in Australia's financial system.

Fels hopes Hayne is up to the job: “He’s a very able judge, we all know that. However, he faces some very difficult policy questions which even those with years and years of policy experience would find hard to answer. I am worried about the ability of the royal commission to step into that breach.”

Of one thing Fels is sure: "Something serious has to be done.”

 

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