The Clayton’s Banking Royal Commission (Part 4): Current regime needs uprooting

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(Cartoon by Mark Cornwall)

The banking sector requires root and branch reform, writes banking corruption investigator Dr Evan Jones in the concluding part of this series.

When did it start?

On 1 December 2017, Fairfax’s indomitable columnist Adele Ferguson reported Prime Minister Turnbull’s calling of a banking Royal Commission. The article was accompanied by a timeline headed 'Where it all began'. Peculiarly, the first entry is for 18 June 2013, with Ferguson then reporting on allegations against a Commonwealth Financial Planning Ltd’s financial planner — here and here.

There was, of course, the Storm Financial scandal, well reported on by Ferguson’s colleague Stuart Washington.

The problems begin decades earlier. My collaborator John Salmon’s memory of deterioration of standards at the National Australia Bank (beginning in 1950) is recounted (p4) in my 'Illusion & Reality at the National Australia Bank Part II, July 2011'. At least at the NAB, malpractice takes off during the 1970s. But the 1980s – the decade of financial deregulation – is when malpractice explodes for the entire banking sector.

There is Treasurer Paul Keating’s 1991 Martin banking inquiry, designed and manned to head off protest at the pass. The massive whitewash inquiry process and report merely enhanced bank victims’ frustration and rage — a phenomenon simmering now for close to 40 years. This Royal Commission has been a long time coming.

The root of the problem

The root of the problem is the profound asymmetry of the bank / customer relationship. The bank has preponderant power over the customer and power corrupts.

But if the problem is structural, why hasn’t malpractice always been a systemic problem? I asked John Salmon about his experience at the NAB during the post-War (highly regulated) years. He noted that “things were radically different then”. Banking employment was essentially a lifetime career. There were youthful apprenticeships, with senior management being promoted internally — fostering procedure familiarity, company loyalty and integrity. There was considerable training. A plethora of procedural rules prevailed. Lending criteria were strict and tightly controlled.

As noted, that system was breaking down in the 1970s, directed from the top. 1980s deregulation and changing personnel practices mean that that post-War structure is irredeemably gone forever.

But how to install a means that gives protections to various vulnerable customer groups given the innate structural problem? At the moment, the issue is superficially referred to as a problem of the appropriate “culture”.

I don’t have the answers for this fundamental problem. But a compulsory step is to have authorities understand and acknowledge the nature of the beast. The authorities are not even close to acquiring this understanding. Rather, recent regulatory moves, under extreme popular pressure, remain in the “deckchairs on the Titanic” department.

Compare the asymmetry in the medical profession — the structural subordination of the individual in need of advice, direction, assistance and remedy from medical practitioners. Although that imbalance perennially is of minor consequence, on many occasions it is a matter of deadly serious consequence.

Medical malpractice has its own regulatory failures. But medical practitioners do get investigated and struck off for malpractice. Compare the financial sphere. The odd token financial planner gets banned (even then only for a number of years). Being a corporate sphere, senior management is immune, as are most culpable lending officers. At the moment, I have knowledge of a couple of criminal spivs operating with impunity (from senior management as well as from authorities) who merely shift their location between major banks as the going gets hot — going from the NAB to Westpac and back to the NAB again. 

Surprisingly, in November 2017, it was reported that 20 bankers within the NAB had been 'terminated, or were no longer employed by the bank'. Thirty others lost their bonuses — what a penalty! This is a very rare case of cleanup generated from within and is totally uncharacteristic of NAB behaviour. Traditionally, errant loan officers are discretely placed elsewhere in the institution until the issue has disappeared from public view. In this instance, given the scale of the enterprise deemed to be systemically at fault (mortgages to foreign nationals via “introducers”) the setup would have to have been devised, established and condoned for some time by senior management. It appears that those retrenched have been the sacrificial lambs paying the price for sins committed higher up the seniority chain.

NAB CEO Andrew Thorburn and “chief customer officer for consumer banking and wealth” (sic) Andrew Hagger have given themselves self-congratulation for this move.

Hagger noted that

“…we have no tolerance for bankers not following processes."

Yet, in July 2016, Hagger presided over the merger of five NAB super funds into one, forming Australia’s largest retail super fund, at $70 billion. The ebullient Hagger claimed the benefits of an overdue cleanup of the sector, with capacity for greater competition, etc.

However, super fund analyst Phillip Sweeney claims (in copious correspondence with the authorities) that the consolidation merged quite different funds, involving 1.3 million members. The merger was effected without the legally necessary procedures (as claimed by Sweeney to the Chair of a Parliamentary Committee in March 2017) — that of 'a statutory duty as well as a general law duty to execute a Participation Agreement (Deed) with the “successor company” of an occupational pension scheme …'. No such process took place, and the relevant documentation has been withheld from interested parties. Sweeney estimated that the top down change could involve a loss to members of up to $761 million per annum.

When NAB staff were preparing the 5-into-1 super funds merger, they discovered several peccadilloes of operational misconduct. The bank came clean and arranged the payment of $36.5 million in compensation to life insurance claimants and super fund customers. Sweeney contrasts the big-noting of the NAB regarding this affair with the complete secrecy regarding the large scale illegal scam that stands to net hundreds of millions of dollars from super fund clients on a permanent basis.

Sweeney has also estimated that the Big 4 “for-profit” super funds have recently taken in an aggregate $17 billion per annum and, via related party distribution of funds and excessive fees, have siphoned off $7 billion of this sum (of which $2 billion by the NAB) for higher profits and thus for its shareholders — what Sweeney labels a “profit capture model”. Of government-mandated contributions going to big bank for-profit super funds, approximately 40 per cent is being siphoned off to bank shareholders. This is legalised plunder on a grand scale.

Sweeney also claims that ASIC and APRA ignore their legal obligations for oversight, and are complicit in this scam and in the related denial of access to documentation.

In addition to comprehending the essential nature of the beast, a complementary compulsory step is to take seriously, rather than offering lip service, white collar crime procedures in which the penalties fit the crime — the absence of such a link over recent decades constituting a farce.

In May 2017, in one of the myriad schemes cooked up by the Coalition Government to head off a banking Royal Commission, Treasurer Morrison announced the establishment of a “Banking Executive Accountability Regime” (BEAR). Borrowed from a British development, the aim is to have the banks to develop “a map of the roles and responsibilities” of senior executives, ultimately so that adverse behaviour of the bank over which they preside can be attributed to its source. APRA is designated as the policeman.

There is something desirable in this move as a matter of principle, with the need to cut through the jungle that mediates the complex relationship between key decision-makers, initiative-takers, order-followers and outcomes. But BEAR could be yet another form of window dressing. Breaches are formally to be met by fines only on the organisation, with no charges made on the responsible individuals. Moreover, APRA has shown itself utterly complicit with bank malpractice, with every indication that there is no prospect of it acquiring intent to effect its legal responsibilities. Who is to watch over the watchdogs? There are no such bodies.

At issue, behind the root of the problem is the entire structure and its ideological cover put in place since the 1980s. There has been no mea culpa from successive generations of anybody in authority that the utopian benefits claimed by deregulation and privatisation advocates, and implementers might have got it wrong.

Fred Argy, Treasury bureaucrat and Secretary to the Campbell Committee and key author of the 1981 Campbell Report, briefly expressed concern in April 1995 as to how his baby had developed into adulthood. Yet he defended the overall Campbell agenda and minimised potential policy discretion to offset dysfunctionality. He remained captured within establishment economist verities and his muted criticism disappeared immediately into the ether.

There has been one strong critic — and that surprising. John Hewson was, in the 1970s, adviser to Treasurer John Howard and a key figure in motivating Howard to establish the Campbell inquiry in January 1979. For a period, Hewson wrote a weekly column in the Australian Financial Review and, on several occasions, he decried the financial system’s anti-social character. Thus, under the title 'Bankers have no shame' on 13 August 2010, he wrote:

'As one who has spent much of his professional life fighting for deregulation and reform of our financial system to give our banks many of the freedoms and structures that they now enjoy, I am embarrassed that I have contributed to breeding this sort of arrogance and behaviour.’

Since Hewson’s eclipse as Liberal Party leader in 1994, his opinions carry no weight. To date, nobody who carries political weight has expressed a similar sentiment.

Everybody in authority and in opinion-making circles is captured by the same dysfunctional mentality, in which an understanding of the root of the problem is rendered impossible by construction.

By default, the pressure for a banking Royal Commission, and a root and branch cleanup of the sector, had to come from below.

A note at the end: document discovery

Court litigation proceeds on the basis of the material available to the litigants and the judge/s. In litigation involving banks and their customers, the bank has always been concerned to prevent the availability of any bank documentation that supports the victim’s case against it. In legal parlance, they try to avoid “discovery”.

Banks will claim that they have mislaid key documents demanded, or that they have destroyed them because of the lapse of time. Highly paid grownups argue “the dog ate my homework” ruse. In one case, when the NAB advanced funds to a woman’s errant partner without her knowledge and then claimed that she had guaranteed the loan (and thus was liable for the debt), the NAB claimed that the (non-existent) guarantee document had been lost by the NAB’s then record-keeping company Iron Mountain.

In the late 1980s Somerset/Kabwand case, the NAB, in league with its establishment solicitors Thynne Macartney, claimed that vital documents requested had been lost in a flood. Two weeks later, a senior bank staffer, wanting absolution from a cover-up, admitted to the existence of the documents.

Often the existence and pertinence of particular documentation is unknown to the victim, a situation where a consultant experienced with banking procedures is necessary to highlight what is required in discovery.

Sometimes, a bank will dribble discovery over a period of time, or occasionally discover key documents at the eleventh hour (Friday night at 5.30 pm for a Monday hearing), strategically putting the victim/s and their legal team in complete disarray. In the Somerset/Kabwand case, lending officer diary binders containing what was known as the “duplicate running sheets” were handed over, without affidavit cover, after the trial had commenced, on the Saturday mid-way between the two week trial hearing.

Bank loan officers have been required to create considerable paperwork as a background for an establishment of the contractual relationship. Where such paperwork exposes bank officer neglect or duplicity, a bank may fabricate false meeting diary notes, etc, and “discover” these fabrications in litigation. Diligent discovery, especially if ordered by the court, may uncover telling discrepancies between original documentation and the forgeries. Thus was the case in Nobile (& Martelli) v NAB Qld FCA 143, 11 May 1987, and Somerset/Kabwand v NAB, QSC, 29 September 1988 (judgment withheld). In the latter case, belated close scrutiny exposed that the key lending officer had reconstructed records as part of a fraudulent process. The judge decided for the guarantors in Nobile, but the judge ignored the document fabrication (and associated fraud) in Somerset/Kabwand.

Unfortunately, judges have perennially been complacent with the penury of bank discovery, thus being complicit with the denial of key documents that could in principle swing the trial in the victim’s favour.

I bring up the issue of discovery here because a Royal Commission is endowed with full powers of discovery. This is a key power that Parliamentary Committee inquiries lack. Thus, we have had myriad parliamentary committee inquiries into bank malpractice and regulatory failures, and little comes of them. Bank executives lie at will to committee members at hearings without retribution.

For example, the documentation relevant to the CBA’s purchase of Bankwest from HBOS in December 2008 is extremely pertinent to the CBA’s default and foreclosure of close to 1000 Bankwest borrowers around the period of purchase. Bank executives claimed at inquiry hearings that everything was above board and known, in spite of victim claims, but parliamentary committee members had to let the issue go through to the keeper.

It is now incumbent on the Royal Commission staff to subpoena all documentation relevant to that purchase. Documents relevant to the CBA’s contemporaneous foreclosure of Storm Financial could do with comparable forensic investigation.

The relevance of discovery is highlighted by cases of significant corporate malfeasance in the U.S., brought back into visibility following the publication of a biography of the judge involved. The judge was the mild-mannered Minnesotan Miles Lord.

Book reviewer (and corporate crime watcher) Russell Mokhiber notes:

‘Judge Lord was known for confronting corporate executives face to face for their corporate crimes and other wrongdoing — most notably the executives of A.H. Robins Company, the maker of the Dalkon Shield, and Reserve Mining, the company that dumped 67,000 tons of waste tailings a day into Lake Superior for more than a decade. I am not anti-corporation, but I am anti-hoodlum, anti-thug, anti-bank robber and anti-wrongdoers,” Judge Lord said. “Some of these wolves wear corporate clothing.”’

Quoting Lord’s biographer Roberta Walburn:

‘As a judge, he would often sound more like a preacher than like a judge. He believed in the goodness of people, but that good people did bad things if they were in a corporation where the pressures were on them to sublimate their individual responsibility to the corporate entity — a corporate entity that had no heart, no soul and no conscience. He believed that if he could break down the corporate walls and talk person to person to the corporate executives that he could convince them to change their ways. He was always trying that.’

These comments could serve as a leitmotif for the current drive against a refractory financial sector and the “regulatory” bodies that give it sustenance.

In the Dalkon Shield case, Lord struck it lucky with a whistleblower. The insider documentation saved the reputation of the courageous Lord and ultimately destroyed the unrepentant company. Alas, whistleblowers are unhappily rare because of the attacks and suffering they experience from their actions. In the current situation, the Royal Commission, with its powers, can demand documentation and process its implications, supplanting the requisite army of whistleblowers.

In the meantime, in league with their own army of lawyers, one can surmise that the banks are furiously shredding incriminating documentation by the truckloads.

Hopefully, the exposure of long term bank criminality by the Royal Commission will be the best entertainment available in the coming year.

Dr Evan Jones is a retired political economist.

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