Self-regulating banks rob us blind: The need for a Royal Commission (Part 3)

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Beware of geeks bearing gifts (Meme via @pftravers77)

Labor has taken a principled stance in supporting a banking royal commission, but must hold its nerve against the a bank lobbyist tsunami, writes Dr Evan Jones, who concludes his analysis of corrupt self-regulation in the banking sector.

Labor runs with the ball

ON 6 APRIL 2016, the prime minister rose from his habitual indolence to chastise the banks. The occasion was, of all places, the 199th birthday celebration of Westpac bank. Only several days previously, ASIC had launched action against Westpac for rate-rigging.

If Turnbull had imagined that he was being bold in his stance, the punters were not impressed. Letter writers to the Sydney Morning Herald were derisory.

For instance, from John Richardson of Wallagoot:

Why is it that our politicians think that they can shamelessly lie, deceive and cheat the entire nation on a daily basis, sanction the most heinous behaviour against the most defenceless, while enriching themselves from the public purse, and still expect that anyone will listen to, let alone respond to, their hypocritical, self-righteous lectures? Bah humbug.

And another, from Peter Leonard of Kingscliff:

So the PM gets stuck into the banks' failure to show some social responsibility, but does not see a need for a royal commission. Once again, as with his past feel-good words on changing the way politics is done in this country, on ensuring fairness in the taxation system, on health and education, we get comforting assurances and no action.

On 7 April, the SMH editorial, perennially conservative or cautious at best, came out for a royal commission. Remarkable.

Then, out of the blue, on 8 April, Labor takes a stand for a royal commission. Even more remarkable. The rightwing machine that runs Labor has done something we can believe in for a change.

The press reported on the unexpected change:

When asked why Labor had waited years to call for a royal commission into banks Mr Shorten said: "After every financial scandal we have been told this is an isolated incident. But there's only so many isolated incidents you can have before you have a systemic problem."

Perhaps cynical — as Ross Jones notes on this site:

Labor’s banking Royal Commission is one of the great all time wedgies, a handful of belt and underpants that made the Coalition’s financial genii’s eyes water and snot to form in small beads on their collective upper lips.

Quite. Game on.

CBA whistleblower Jeff Morris immediately lent his authority to the call:

I've seen things that are so utterly appalling that you might think that people saying these things were cranks, but for the fact that you'd seen them yourself.

It's only a royal commission that will be able to do this job: that will have the resources. The parliamentary inquires: they've done a terrific job, the various parliamentary inquiries. But they have very limited resources and very limited time. The thing about a royal commission is: it's got plenty of expert staff, plenty of time and plenty of resources to actually get to the bottom of this sort of appalling behaviour.

Then came the immediate barrage of naysayers from within the industry and from their toadies in the Coalition ranks.

On 8 April:

The Australian Bankers' Association says the royal commission now being advocated by Bill Shorten is entirely unnecessary and would even be counter-productive. The government agrees, branding it rank populism in an election year.

When I see the word “populism” being bandied about I reach for my gun. The word is resurrected by unscrupulous, lazy and ignorant elites and editorialists to discount the substantive experience and complaints of the disenfranchised.

Treasurer Scott Morrison maintains that the Australian Securities and Investment Commission has even more extensive standing powers than a royal commission, and as such, no dedicated probe is required. He says that the banking watchdog, the Australian Prudential Regulation Authority has imposed stringent capital holdings requirements on the big banks and keeps a sharp weather-eye on their activities. And he further notes that the Reserve Bank also provides a rigorous operating framework for the commercial banks.

All wrong, of course. If the regulators had done their jobs, the succession of disasters would not have occurred or, if so, would have been subject to assertive retribution of those responsible. Nothing of the sort.

The same day:

National Australia Bank chief Andrew Thorburn has branded Labor's push for a royal commission into the finance sector a "serious distraction", as the banking industry rejected the proposal as unnecessary and potentially damaging to confidence. …

… bankers including Mr Thorburn argued the proposal was unnecessary, saying banks had already received extensive scrutiny through various inquiries including the financial system inquiry led by former Commonwealth Bank boss David Murray.

Thorburn presides over an ongoing corrupt regime at the NAB, so his response is predictable. As for “damaging to confidence”, what a laugh. It would have been more strategic for the vulnerable Mr Thorburn to have stayed out of sight.

As for “extensive scrutiny” — complete bullshit. David Murray, being part of the problem, ignored the issues that lie behind the call for a royal commission.

On 11 April, Turnbull repeated Morrison’s verbiage. So did Fairfax columinist Peter Reith, the ex- Liberal Minister tarnished forever with his corrupt involvement in the waterfront dispute. What is Fairfax doing giving this shyster a running platform?

Another John Richardson missive, this time on Crikey, goes straight for the jugular on this tripe, including “head-kicker” Liberal MP Steve Ciobo in his sights.

Meanwhile, three other National Party MPs (George Christensen, Luke Hartsuyker and Ken O'Dowd) claimed themselves amenable to a royal commission, joining Nationals John Williams and Warren Entsch. Then three Liberal MPs – David Fawcett, Bert van Manen and Philip Ruddock, all members of the Impairment of Customer Loans Inquiry – joined the dissent.

The Australian Financial Review tribe chimed in against the Labor initiative. On 11 April, it was Christopher Joye. On 7 April, it was Tony Boyd. On 8 April, it was Jennifer Hewett. On 9 April, it was Tony Boyd again. And so on. All of these articles divert to irrelevant obfuscation. Our post-deregulation banks are healthy, profitable, efficient, vital to the economy, blah blah blah...

If Fairfax management gets a kick out of retrenching staff, why doesn’t it simply cease publication of the Fin? Towards that end, I raise a glass to ex-Fairfax journo Paddy Manning.

On 12 April, academic Dr Andrew Schmulow argued for the necessity of a royal commission.

There are cultural and ethical malpractices prevalent in Australian banks which our regulations do not address and which our regulators have struggled to contain. Those malpractices appear to be spreading, and our banks have failed to act meaningfully. The potential effects can be dire, so we need to find solutions. [Murray’s] Financial System Inquiry failed to address the problem. A royal commission would.

Asking [the] question — how to improve the culture of our banks — involves asking for information which may be incriminating. The people asking the questions, in order to arrive at credible answers, need the power to compel those answers. If compelled by a royal commissioner, the answers would have to be given publicly.

Quite. Fairfax reproduced Schmulow’s article (without acknowledgement) on 15 April, juxtaposing Schmulow’s stance with that of the Ethics Centre’s Simon Longstaff. Bizarrely, Longstaff opposes a royal commission. The regulators have the capacity, he claims, just give them adequate resources for the job. Investigations are best kept secret. Banks are cleaning up their dysfunctional culture themselves. Ethics, smethics, Longstaff is an embarrassment.

On 14 April, at a luncheon speech, former ACCC tsar Allan Fels contradicted the Coalition’s mantra about the regulators being on top of the job.

Instead, he reportedly stated:

Australia's corporate watchdog lacks a strong culture of law enforcement and is "too cautious" when it comes to pursuing wrongdoing by companies. Professor Fels said [ASIC] needed to be more "courageous" in pursuing litigation and had relied too heavily on negotiated settlements — known as enforceable undertakings [EUs] — struck between ASIC and companies that have transgressed. …

Professor Fels … said that if a parliament had passed legislation outlawing something, the job of the regulator was to ensure those laws were complied with — not to strike EUs where there had been serious breaches of the law.

Quite, again.

On 14 April, it was Bendigo Bank’s Mike Hirst:

Labor's commission "will be a drain on the economy to be honest if that gets up, because I don't think you can look across the banking industry and say there is a culture across the industry that encourages poor conduct …"

"There are examples of poor conduct that have happened that need to be addressed. But to generalise the issue across the industry is a stretch, and to me a royal commission after we have just had a financial system inquiry, would be a waste of taxpayers' money.”

Hirst rightly notes that extant staff incentive structures have to be abolished, but claims that the banks are going to heal themselves. Ludicrous. Sorry Mike, but the evidence highlights that it’s an industry-wide problem.

On 16 April, Mike Seccombe in the (subscriber-only) Saturday Paper cited more establishment (“conservative”) figures, all against a royal commission.

Thus Warwick McKibbin, ANU economist and sometime RBA board member:

'There are small cases of problems in the Australian system but they’ve all been picked up … It’s also the case that most political and other corruption is picked up not by regulators but by whistleblowers. It is ever thus.'

Seccombe quotes media darling Saul Eslake as saying that a royal commission would delay reforms — reforms that the Government could address right now. Except, Saul (and Warwick), the problems, not small, haven’t all been picked up and governments and regulators have been determined to avoid serious reform.

On 20 April, Adele Ferguson captured the mood that Turnbull has missed.

The Coalition government has a record of badly misreading the depth of public anger in relation to the banks, and includes poor financial advice, dodgy life insurance, mortgage fraud, bank bill rate rigging as well as broader corporate bribery and corruption. Dragging its heels on reforms, sitting on recommendations for months and having a revolving door of financial services ministers, has done little to engender public trust.…

But it seems since Opposition Leader Bill Shorten vowed to hold a royal commission into the banks, he has tapped into a rich vein of support, and formed a connection with an increasingly cynical Joe Public. … There can be no disputing that the banks and the Coalition has misjudged the situation or depth of concern about bank ethics and misconduct. If they had, they wouldn't be in the current situation.

On 20 April, the Government reacted to Labor’s ascendancy by promising more funding for ASIC. Yet much of this funding is to come from industry itself, a furphy picked up by Ross Jones. What a joke. The Government has clearly declined to distinguish ASIC’s distinct roles — provider of a company establishment register (already a good earner) and a watchdog over corporate malpractice.

So the industry should finance its own regulator for best results? ASIC Chairman Greg Medcraft supports the industry funding model. We’ve seen that already with the Financial Ombudsman Service. FOS is corruptly embedded with its financers’ interests. ASIC is already a laggard without further entrenching its structural weaknesses.

In any case, ASIC’s culture is the problem, as acknowledged here. Enhancing ASIC’s funding will not remedy that problem. ASIC senior management is promising a more assertive approach. We’ll believe it when we see it.

Yet again, Adele Ferguson talked plainly on the Coalition’s proposals:

Whether the latest package is enough to convince a cynical voting public that the Coalition is serious about the sector and addressing bank misconduct, will be revealed on July 2 … Until then there will be a lot more politics and a lot more rhetoric. What would put the matter beyond doubt is the blowtorch of a royal commission.

Lest anyone get mildly optimistic, a 21 April speech by CBA CEO Ian Narev reminds us who’s in charge.

Commonwealth Bank of Australia boss Ian Narev has vowed he won't be cowed by a swathe of negative publicity into paying compensation to undeserving dissatisfied customers who are being "unreasonable" and "trying to embarrass" the bank.

Narev prattled on about improving internal procedures, but, on the CBA’s past record of improving nothing except its rapacity, it will be business as usual.

On 23 April, two articles in the SMH, by Ruth Williams and Adele Ferguson, neatly summed up the state of play and the associated propaganda war. Labor had forced the Government into action, but the Government’s actions are bandaids.

Lack of whistleblower protection remains a key failing. Behind that lack, what is going on behind the scenes that produces whistleblowers. and what is management trying to hide?

As Ferguson noted:

The IOOF whistleblower who was sacked after using the company's internal whistleblower policy to reveal serious misconduct, is adamant the latest reforms to ASIC and suite of bank promises is no substitute for a royal commission.

The whistleblower, whose identity is well known to IOOF but who requested anonymity for privacy reasons, is "frustrated with ASIC's obvious lack of motivation". He gave the regulator 59,000 documents almost a year ago … He says he has had little contact except for a few emails and a 35-minute meeting [and then nothing]…

"This is what happens when there's no transparency with the public, especially for whistleblowers," he says. "They just get shafted because it's easier to shaft one person than a billion dollar-plus institution," he said.

On 21 April, in a radio interview, Labor leader Bill Shorten heralded that the banks’ “vertical integration” would be a significant issue on a royal commission agenda. And appropriately so.

Cross selling, underpinned by management pressure on staff, is intrinsically anti-competitive and conducive to corruption.

The Murray Financial System Inquiry, naturally, found little wrong with the current arrangements, in spite of the inquiry documenting:

the growing consolidation by big banks in the wealth industry. This includes: large financial groups with a material cross-industry presence accounting for about 40 per cent of total superannuation assets; the five largest platform providers (the big four banks plus AMP) holding almost 80 per cent of the primary financial planner relationships with customers; and 56 per cent of planners belonging to dealer groups that are majority owned by institutions or other wealth managers, or being part of a bank branch network.

Soon after, shadow treasurer Chris Bowen, reiterated Labor’s agenda. The object would be not to mess around on the margin, hoping for banks to reform themselves and the ACCC to keep a watchful eye and act on abuses, but to question vertical integration per se.

It is imperative that divestment of wealth management by the banks be on the agenda. The amalgamation of these sectors (as condoned by the 1996 Wallis inquiry) should never have occurred in the first place.

Interesting that the ultra-cautious Fairfax columnist Malcolm Maiden has given a free kick to Labor’s royal commission proposal. Maiden is too kind to the banks and the regulators regarding the supposedly moderate fallout in Australia from the GFC. But bouquets are better than brickbats, regardless of the source.

Lessons from the propaganda war

On the evening of 4 May, the report of the Impairment of Customer Loans Inquiry was issued. The Inquiry received poor media coverage; ditto the report itself.

The majority report makes many useful recommendations. However, the wishful thinking continues to run deep. The heavy lifting with respect to lender-borrower conflict is to located with the newly created Small Business and Family Enterprise Ombudsman.

In its previous incarnation as Federal Small Business Commissioner, the organisation was government-funded. Now the SBFEO is to be industry-funded! There is no mention of the extant Financial Ombudsman Service, whose industry-funded character has resulted in its complicit and corrupt handling of small business, and other complaints. This is a farce.

Kate Carnell has been appointed as head of the SBFEO.

Yet from and since her role as ACT Commissioner, she has been a political operative and lobbyist. She appears to lack the capacity for the role demanded of the SBFEO in these recommendations.

The key words “royal commission” are glaringly absent from the majority recommendations. The Liberal members of the Committee, for a moment supportive (as above), have gone to ground. At the hearings, Philip Ruddock perennially threatened the CBA to “heal itself” or face a tough reaction. The CBA, in the person of legal counsel David Cohen, consistently told Ruddock to buggar off. Now Ruddock has gone to water.

Shockingly, Nationals John Williams has silently joined the majority. Clearly, the Prime Minister’s Office has transparently dictated the central thrust of the report.

It was left to the Labor Committee members to write a minority report, claiming the necessity for a royal commission to clear the crowded deck. Rather than this stance being a Party dictate from without, the more probable inference is that Labor Committee members’ experience fed into Shorten’s statement on 8 April.

The minority report notes, appropriately:

1.4 We agree with the finding that there has been a persistent pattern of abuse arising from the asymmetry of power in the relationship between lender and borrower. However, we do not agree that the evidence received in this inquiry is sufficient to conclude that there was no widespread or systemic illegal or unethical behaviour by banks.

1.5 Labor members of the committee believe that there is more evidence of banking misconduct that needs to be investigated. Recent media reports highlighting the Comminsure scandal, the tampering of loan documents (revealed on Four Corners, 1 May 2016), various financial planning scandals, bank bill swap rates and other matters indicate that there may be broader systemic issues with the behaviour of banks.

It is depressing to experience the reactions of the Liberal Party MPs, parroting the decided line against a royal commission and in defense of the existing regulatory structure, save for some beefing up of the latter.

It is depressing to confront that our elected representatives are happy to display, with complete insouciance, their pig ignorance and their bought status. They don’t care. Thus they cannot be trusted. We are being governed by cowards, charlatans and spivs.

Labor has taken a principled stance, regardless of motives. The public is behind it on this issue. But even if Labor gets into office (and the media won’t help), it has to hold its nerve against the lobbying tsunami that will descend on it.

For once in the cesspit that is the current political arena, is it possible to hope that something positive will transpire?

Dr Evan Jones is a retired political economist. He has been writing on bank malpractice against small business and the family farmer for over a decade.

For a more in depth analysis of the latest in the series of parliamentary inquiries into system bank corruption, read Dr Evan Jones' 6-part series:

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