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(Cartoon by Mark Cornwall)

Dr Evan Jones summarises the issues confronting the Hayne Royal Commission, which he has been investigating for over 30 years.

[Read Part One: The Clayton's Banking Royal Commission]

OVER THE LAST 30 YEARS (since comprehensive financial deregulation), the scale of public exchange regarding complaints about banks, bank opposition to reform, and the combination of official formal concern with substantive inaction has been massive.

Selective memory filters the past so that our brains don’t explode and we can function in the present. But this filter has worked to the advantage of the banking sector and its collaborators (including in the regulatory agencies and in politics). The banks lobby and stonewall, wear everybody out, the media complicit, things quieten down for a while. Bank malpractice continues, perhaps takes new forms, the fight flares up again, and the banks and their collaborators resort to time-worn strategies of lobbying and stonewalling. The pollies promise reforms that turn out to be hollow. The regulators draw their salaries and mouth platitudes at bizoid conferences. Variations on a theme.

Being long addicted to cutting articles out of newspapers (before the digital revolution) I have a better idea than most of the scale of the exchange, the passage of time and the nature of the impasse.

Do not imagine that we are now experiencing an unprecedented height of dissent with inevitable prospects of unprecedented progress against bank bastardry. We’ve been there before in the late 1980s and early 1990s. The Foreign Currency Loan Scandal (FCL) alone kept banks’ foul play constantly in the media. I have a fat folder of FCL cuttings spanning 15 years, from 1986 to 2001.

The coverage reached a peak of frenzy during 1991, with the exposure of the so-called Westpac Letters (for which, scandalously, the odd account previously on the web has disappeared). The one weakness then compared to now was that there was only one Parliamentarian on board – Democrat Senator Paul McLean – and he was driven out for his impertinence.

So what happened to the dissent? Treasurer Keating gave us the 1991 Martin Inquiry and Report and a follow-up mickey mouse Elliott Committee, that was supposed to monitor post-Martin reforms. The dissent was siphoned off, worn down.

The Westpac Letters story and the corrupt Martin Inquiry process are outlined in the book authored by McLean and his legal adviser James Renton, Bankers and Bastards, 1992.

All we got following the Martin inquiry was self-regulation via the Banking Ombudsman and the Code of Banking Practice, both quickly neutered. Westpac was broke. The CBA, in the process of privatisation, had to be tarted up. The banks had to be saved from themselves and the victims be damned — a now recurring pattern with financial crises.

Thus premature optimism regarding the current scenario should be kept in check.

A quick run through the state of play

In August 2015, I wrote a three-part article on this site on recent scenes in this 30-year continuous drama:

  • On 12 August I recounted the great burst of the regulator’s discovery of and "amazement" at a dysfunctional culture within the banking system. As I noted, all talk and no action.
  • On 17 August, I listed a number of bank victims over the years, some for whom the foreclosure process highlighted criminality to a high degree. No bank is without guilt, including the pathetic second tier bunch. I also noted the chief personnel (notably, CEOs and law firms) responsible for each  takedown.
  • On 20 August, I emphasised the need to prosecute personally individuals within the banks, whether errant lending officers or senior managers. I highlighted the legal difficulties of pursuing individuals within a "guilty" corporate entity, but emphasised the high priority of resolving these difficulties within the Commonwealth Criminal Code and the Corporations Act.

Desirably, a Senate inquiry into the penalties for white collar crime was established and delivered its report in March 2017. A single article covered the issuing of the report — Adele Ferguson in the Australian Financial Review, 27 March. Ferguson highlights the report’s recommendations for higher penalties for both civil and criminal offenses, including gaol terms.

A Treasury-resourced ASIC Enforcement Review Taskforce was earlier established in October 2016. In October 2017, the Taskforce issued Position Paper #7, whose recommendations for enhancing penalties are neatly summarised by Minter Ellison

All this looks impressive on paper, for once. But what does it mean in practice?

First, there is no mention of ASIC’s willingness to act in said enforcement. There is no mention of the 2014 Senate report into ASIC’s failings.

Ferguson highlighted the lacuna:

'But more powers and resources can only go so far. ASIC has to have the backbone to use them. The 2014 Senate inquiry into ASIC found it was a "timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution".'

Instead, the line, mutually pushed by ASIC itself (naturally) and the authorities, is that ASIC’s failures are merely a matter of inadequate enforcement powers and resources. That mentality was prominent at the 26 April 2017 hearings of the Senate Consumer Protection Inquiry at which ASIC representatives appeared.

Second, to what crimes in particular and what roles are these penalties addressed? Language remains in the abstract. There is a disconnect here. Are the authorities thinking about insider trading, or rogue financial advisers, or staff embezzlers of company funds? In all probability they are, but these arenas are already covered or could be readily fixed up. Are the authorities thinking about bank CEOs and chief general counsels? Almost certainly not. Indeed, it is not unlikely that the authorities have yet to conceive that these elevated personages could actually conceive or engage in white collar crime.

Until the authorities get around to the latter categories, then all this self-congratulation regarding heightened penalties is so much grand-standing.

The litmus test is the CBA foreclosure of close to 1,000 former Bankwest customers when the CBA acquired Bankwest in December 2008. This affair was transparently a crime — a crime of large scale, a crime conceived and perpetrated strategically, and a crime that could only have been directed at the most senior levels of CBA management. ASIC looked the other way. The two parliamentary inquiries established to examine this affair – the 2012 Post-GFC Banking Inquiry and the 2015-16 Impairment of Customer Loans Inquiry – merely went through the motions. The senior executives of CBA and Bankwest, who should be up for investigation, lied to both Committees during the hearings.

Integral to the second point is the problem of attribution of corporate crime to specific individuals. The Penalties for White Collar Crime report and the Taskforce don’t touch it. As I mentioned in my 20 August 2015 article, the massive Corporations Act doesn’t seem to acknowledge bank (or other "financial service providers") crimes against customers. The Commonwealth Criminal Code Act and its possibilities has been ignored. If the authorities are serious, they should be employing the finest legal minds (in conjunction with related experts overseas) in tackling the attribution problem.

At present, the likelihood is that, at best, a regime of enhanced penalties will capture the odd low rent rogue element, sacrificial lambs, while the serious Main Street criminals at the heart of the beast continue with business as usual. This is precisely what happened following the Senate Insolvency Practitioners Inquiry and Report in 2010 (the thoroughly corrupt industry continues unabated). Ditto with the unfolding after 2014 of the Commonwealth Financial Planning scam of its clients, when a handful of financial advisers got the chop but senior management stayed immune.

The Royal Commission

In mid-2016, I wrote another three-part article on this site.

  • On 23 May, I provided a longer perspective on the banks versus the public interest, starting with the 1937 Royal Commission and elaborating on the bitter battle after the banks were let off the regulatory leash in the 1980s.
  • On 24 May, I highlighted that, during two years of public pressure and from the Parliamentary Greens, the two major parties (the Nationals being invisible) showed themselves less than enthusiastic about a banking royal commission. With the exposure of the Comminsure scam in March 2016, the two Parties were left flat-footed with the escalation of public outrage. In April, Labor opted (cynically, for electoral gain?) to support a royal commission.
  • On 25 May, I outlined the hysteria that followed Labor’s formal commitment. Hysteria from the banks, their collaborators and the Government. A royal commission is not needed, counter-productive and so on. That was a year-and-a-half ago. Following more bank scandals (the CBA’s money laundering affair), unprecedented Coalition backbencher pressure, the Big Four themselves decide to support a Commission, hoping to keep the whole thing under a semblance of control.

What’s at stake?

Let’s be clear about the necessary scope of the Commission’s investigations.

The banks are at the centre of it.

Yet another Parliamentary inquiry into bank lending has just concluded: a Senate Committee on Lending to Primary Production Customers. One impetus for the Inquiry’s establishment was farmer outrage at the treatment of Landmark borrowers after it was taken over by ANZ. More heart-breaking victim submissions and hearing testimony to savour. The report was handed down on 6 December 2017, with seemingly no coverage in the mainstream media at all. Par for the course.

Many of the recommendations merely request that bank lenders act legally and effect their borrower relationships with the most basic of professional ethics. That's what it's come to. The report recommends (#11) that the ANZ / Landmark takeover be subject to proper judicial scrutiny. Meanwhile, ANZ’s CEO Shayne Elliott claims that ANZ "has nothing to hide" from a royal commission.

He made no mention of the ex-Landmark borrowers. Recommendations #15 to #21 all relate to the pressing need to reform receiver practices (see below).

But the banks are just the core. Any industry on the bank teat will be part of the problem. Forgive me if I’m repeating something said before.

Add the law firms that are integral, indeed in the front line as agents, to the banks’ corrupt activities. The mix of key firms has changed over the years, but Gadens appears to be now top of the "do anything for a buck" list. Kemp Strang is up there. DibbsBarker is also high on the list, especially for the NAB in NSW. Minter Ellison is not averse to earning dirty money. HWL Ebsworth appears to be wanting to join the A-listers.

There are also second tier "bottom feeders" who hang around for smaller jobs.

There’s the valuers. There is a pressure to value customer assets high as prelude to a loan and low on the way to default and foreclosure. The issue occasionally receives public attention and then disappears from view. Industry representatives appeared at hearings of the Impairment of Customer Loans Inquiry – 18 November 2015 (Australian Property Institute), 16 February 2016 (Australian Valuers Institute) – and talked rubbish, to the guffaws of victims present.

According to victims and the evidence available, the CBA takedown of Bankwest customers after 2008 involved widespread discretionary devaluation of customer assets, providing CBA with the requisite default trigger.

There’s the odd management consultant/administrator. A bank will occasionally demand that a business customer receive a consultant for investigation and report, at customer expense, whether or not a customer is then in trouble. The pretext is that the consultant will act to improve the operation of the business, but the sub-text is that the "investigation" is merely a contributory vehicle to the business’ subsequent default and foreclosure.

There’s the receivers. This is an outfit perennially devoted to plunder. The tendency to criminality is directly a product of the absolute discretion available to the receiver once placed in a foreclosed customer’s business on behalf of the bank lender.

On 27 November, the new West Australian One Nation Senator Peter Georgiou asked Senator Brandis, representing the Government, questions regarding the ongoing parlous experience of bank victims, especially farmers. Brandis, struggling to look confident before gaining his customary hubris, responded with the salvo:

"A royal commission would take forever and achieve nothing. Except for the bevy of lawyers who will be able to afford new beach houses on the strength of the fees…"

Georgiou then pressed Brandis regarding a noxious rip-off of a foreclosed farmer by the predatory receiver Korda Mentha.

Brandis responded [partial paraphrase]:

The corporate insolvency field is one where I used to practice and with which I am very well familiar. It is known that corporate insolvency practitioners sometimes charge from the estate extremely large fees. However, corporate insolvency practitioners are subject to very very rigorous regulation under the Corporations Act and also rigorous regulation and oversight by their own professional body. The arena should be kept under review and the Treasurer and Assistant Treasurer do keep it under review.

This is all 100 per cent bullshit. Brandis, as he admits, has been in the right place to know it. But Brandis is a spiv — the perfect representative of now rampant amorality amongst the political class. Why then did the Sydney Morning Herald devote its Saturday interview to this man, when there are countless selfless individuals working for worthy causes who deserve greater exposure?

A colleague, working for Deloitte in the late 1980s, claims that insolvency practice was then a specialist profession, shared amongst a handful of individuals within the big audit/accounting firms. Came the crazily-built bank-financed hot air firms, and the early 1990s recession and receivers were in high demand, and liable to sue everybody. Thus, the practice was split off into a separate sector, inflated by a lot of dodgy blow-ins and its professional character vitiated. The current ethics-free culture was thus established during the 1990s.

There’s a decent sub-set of real estate agents who are prepared to cater to bank interests at the expense of foreclosed customers by declining to advertise foreclosed properties properly and, ultimately, selling such properties under value.

Then there’s the judiciary itself. The problem that bank victims have in court would fill a fat treatise. One of the great lies is that banking-related litigation metes out justice to the litigants.

A key banking law text claims (Tyree & Weaver’s Weerasooria's banking law and the financial system in Australia, 6th edn, 2006: p488) that the lender-borrower relationship

'... is based on contract and the parties deal at arm’s length, with no obligation on either party to act with any higher duty to each other than that required by the law of the marketplace.'

And the law of the marketplace? The law of the jungle, as decreed by the High Court’s then Chief Justice Murray Gleeson in ACCC v Berbatis (HCA 18, 9 April 2003). According to Gleeson, the more powerful party (the bank) has not merely the right to exploit its power against the weaker party but an obligation to do so. 

Suffice to say, judges regularly preside over cases involving banks that they have previously acted for as barristers and/or with whom they currently have a banking relationship. And, unlike politicians, there is no register of judges’ pecuniary interests. The practice of "judge shopping" – possibly rare, but real – remains unexplored territory.

I have provided a partial list, with brief commentary, of significant banking litigation and outcomes since the 1980s here.

No banking royal commission could be adequate without including the longstanding asymmetric role of the judiciary in enhancing bank power over borrowers. Horror! Which means, of course, that no royal commission worth its salt could possibly get to the root of the matter in a mere twelve months.

Then there’s the regulators.

APRA, ASIC and FOS are all complicit in bank malpractice.

APRA (Australian Prudential Regulation Authority) cares only about the stability of the financial system (that is, the profitability of the banks and so on), to the neglect of its victims.

ASIC denies it has a mandate to act for individual bank victims, who it regularly tells to go away and consider litigation in the courts. This, in spite of the existence, since August 2001, in the ASIC Act of s12C (business to business unconscionability in financial services).

FOS (Financial Ombudsman Service), on all but minor cases, is de facto an arm of the banks. The banks finance FOS, so why shouldn’t the former get value for their investment? FOS’ complicity has been totally ignored by the mainstream media.

In a bid to divert pressure for a royal commission, the Coalition promised, in its 2017-18 Budget package, a one-stop Australian Financial Complaints Authority. The idea has, from the start, been criticised. Who will fund it? Who will staff it? Of course, the proper development of such a body would necessarily involve a close examination of what is and is not working with the three organisations that AFCA is supposed to replace. That won’t happen. One can be certain that the Coalition Government will never confront the failings of FOS. More political grandstanding.

In summary

All these issues are summarised in my submission to the ongoing Senate Consumer Protection Inquiry. That inquiry’s deliberations have been extended and it is planned to report in Autumn 2018. 

My submission pays particular attention to the otherwise neglected significant issue of the perennial lack of justice for bank victims in the courts. As above, for a royal commission to include that dimension into examination will open a huge can of worms. Hayne’s Commission, helped by a restricted terms of reference, will strive to exclude this dimension, but such a discretionary exclusion will transparently highlight that it is not there to root out and deal with the problems before it.

The final part in this three part series will be published early in 2018.

Dr Evan Jones is a retired political economist.

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