These stories – like the recording of a call-centre worker badgering a man with Down Syndrome to purchase worthless insurance – have aired almost on a loop on TV news programmes and websites, as the Commission has moved around the country taking evidence.
I’ve followed the Royal Commission’s hearings for a year. The shock hasn’t been just in the traumatic stories from aggrieved customers, but from the chillingly calm emails, meeting notes and evidence from bank executives discussing how to deal with behaviour that takes money from customers to enrich themselves.
Take AMP. A financial firm with interests in wealth management, mortgages, pensions and insurance that has been in business since 1848. People are now discussing how long it can survive.
One day’s worth of disarmingly-honest testimony from a senior executive revealed how the company ripped off its own customers by charging them service fees but provided nothing in return. AMP repeatedly misled regulators about the company’s deliberate business decisions to keep the ill-gotten funds and maintain the corrupt practices from which they profited. Most notably, the chair intervened in a supposedly ‘independent’ report on the scandal being sent by the company’s law firm to the regulator in order to remove the name of the CEO from a list of staff interviewed, and insert a paragraph clearing him of any knowledge of it.
The revelations of meddling and dishonesty exploded. Suddenly the Government, which had resisted the inquiry throughout, was now proposing legislation to increase fine and jail terms for criminal executives. The CEO’s planned resignation became immediate. The chair and almost half the board resigned. The annual general meeting ended in a shareholder revolt.
But the culture of the company they’d presided over was infected. An internal AMP report said letting customers know they were paying fees for no service could lead to calls for compensation. Taking the money was okay, but informing them “would be a very negative customer experience”. Even after they’d been forced to pay bank customers, they couldn’t stop forcing their staff to lie. A call centre script showed workers were told to tell customers, if they asked about the refunded fees, it was an “administrative error”.
The regulators got a hiding from the Commission as well. Their timidity was key to lax standards, and to companies walking down paths they knew were legally fraught.
Australia’s competition regulator escaped largely unscathed. But the conduct watchdog, the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) that focuses on the overall stability of the financial system, were savaged over their weak enforcement, paltry fines and preference for negotiating settlements rather than prosecuting them in public view.
Both have vowed to ‘muscle up’, with ASIC’s chair James Shipton noting its starting point with enforcement is now: “Why not litigate?”.
That will mean changing the habits of a lifetime. ASIC and APRA – who’ve barely seen the inside of a court-room in a decade – have just received referrals for civil and criminal prosecution for 24 institutions, and unnamed individuals, exposed at the Royal Commission.
The Commissioner’s report was brutally simple: “Why did it happen? Too often, the answer seems to be greed”.
Selling became the focus of institutions attention. From the top floor to the shop floor, everyone was being measured and incentivised to sell without considering how appropriate or useful a product was to the person paying for it. The Commission’s recommendations are focused on ending that: it’s good news for customers; bitter medicine for the banks.
Commissions will effectively be killed off in financial services. Mortgage brokers – who arrange more than half the home loans in Australia – will be forced to accept a ‘best interests’ obligation: they’ll have to do the right thing for the customer, all the time. Car dealers will be subject to the same responsible lending laws as all other credit providers, killing off a ‘point of sale’ loophole that trapped thousands in bad loans. And financial planners will have to contact clients annually and get their on-going agreement about the fees they charge.
Institutions and as yet un-named individuals have been referred to regulators to prepare a case for criminal charges. While the regulators have a limp record of taking matters to court, even a few prosecutions will have an immediate and chilling effect on borderline conduct at big institutions. And such long overdue action might just help rebuild faith in our financial sector.
The final report prescribes a cure for the heart of Australian banking. But the year-long probe did as much good in just diagnosing the sickness. De-regulation, super-charged by weak enforcement of admitted misconduct, fed an atmosphere of bullet-proof risk taking. The system wasn’t broken. For the banks it was working perfectly.
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