February 12, 2019

It’s not just the weather in Australia that has a reputation for sunshine. The country’s economy hasn’t had a recession in over 27 years.

Even as it has surfed commodity price waves for the raw ingredients it exports to the world – most notably the iron ore that has put steel in China’s explosive expansion – Australia has remained a safe, if not particularly dynamic, economy.

Much of the that success is put down to the stability and power of its ‘Big Four’ banks: in order of size, the Commonwealth Bank, Westpac, ANZ and NAB.

As a share of gross domestic product (GDP) Australia’s banks are the most profitable in the world. Their share is 2.9% of everything the nation produces: only China (2.8%) and Sweden (2.6%) come close. The share in the US is 1.2%, and in the UK it’s 0.9%. Figures from ‘The Banker’ put it just as starkly. Even though Australia is the 13th largest economy in the world, with a population of just 25-million people, its banks rank 6th for pre-tax profit.

These figures should add up to sunny days for bankers. But the release of the final report from a year-long inquisition into the culture and practices of the banks has capped a sorry saga of greed, flagrant law-breaking and contempt for customers.

Propelled by a series of scandals at Australia’s largest bank, the conservative Government was forced by its own backbenchers and Coalition partners to cave to Opposition demands for an inquiry. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, launched in December 2017, was given a tight timeline, but extraordinary powers to compel witnesses, extract documents and find answers.

After more than 50-previous probes in recent years, few expected findings that would ruffle the stability of the cosy system.

But retired High Court judge Kenneth Hayne was canny, using jaw-dropping personal stories to illustrate a systemic sickness in Australian banking.

English roofer David Harris developed a gambling problem, and started betting with funds on the first credit card he’d ever been given. When he reached this $10,000 limit, second and third cards came. Offered a credit limit increase to $32,000, he told the bank about his problem and begged them to stop. The bank continued to present him with offers of more credit.

At least he was alive to deal with his problem. Not even death could stop the Commonwealth Bank taking fees from customers – charges it wasn’t entitled to even if they’d been alive. Deceased customers were charged fees for personal adviser services, in one case for more than a decade. The bank received complaints for four years, then sat on internal and external reports about the practice for two more years, before finally informing the regulator of its wrong-doing.

The public already had a dim view of the banks’ rapaciousness; the scandal plumbed their reputation further. It was a morbid angle on a broader ‘fees for no service’ scandal that, exposed in 2016 as a A$178 million problem, has now been revealed to have led to customers being wrongly charged A$1 billion.

The problem wasn’t ‘bad apples’ – or “pockets of poor culture” as the Commonwealth Bank’s initial submission said. The issue was systemic across the big banks – all of which had excellent systems to check the fees were being taken for ‘services’, but little concern for checking if any service was actually provided.

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.