Banking corruption investigator Dr Evan Jones examines whether the Banking Royal Commission will be counter-productive.
IN THE FIRST PART of this series, I canvassed some “naysayers” against the worth of the Banking Royal Commission. Other arguments have been posited as to why it will be positively counter-productive.
“The roof will fall in” brigade
First, it will be inhibiting to bank resilience, detracting and expensive, say bank “analysts”.
'A royal commission impacts the entire sector's ability to reprice mortgages to offset pressures, which is negative for all banks … It will likely lead to further compliance spend from the banks and will also become a distraction for management which can also impact profitability.’
Well dear, dear. Given that the banks brought it on themselves, so what?
A letter from John Landels in the Sydney Morning Herald (29 November 2017) already cited in part one, elicits two complementary arguments:
A government-sponsored commission into our banking system will be regarded by the international finance community as a vote of no confidence in our banks and will question the integrity and the very soundness of our banks. It will inevitably lead to higher wholesale borrowing costs, reduced profitability and higher interest rates.
Not only will that affect the hundred of thousands of Australians who are shareholders in banks and rely on their dividends, it will also affect the savings of every Australian who is a member of a superannuation fund. Every fund is a major shareholder in all our banks.
We pass over the bizarre notion that a Royal Commission will “question the integrity” of the banks.
Thus the second claim. A Royal Commission will destabilise the financial sector, global financial markets will naturally react badly, with an inevitable rise in the cost to Australian financial institutions raising essential funds overseas.
One had the impression that “global financial markets” (GFMs), promulgated perennially by their public relations armies, were all-knowing, all-seeing. Why haven’t these players already factored the accumulated crimes into their data sets and pricing mechanisms?
Apart from the myth of omniscience, the reality is that GFMs are part of the problem. The landscape is ethics-free. And where is the logic between bank malpractice and GFM pricing, given that the Australian banks have been consistently generating world-beating mega profits year after year? In short, who gives a rat’s arse about the GFMs when it’s a matter of cleaning up the Australian financial sector?
And the third claim. All of us, whether directly or through our superannuation funds’ investment, benefit from financial sector profits. A banking sector TV advertisement is pushing that line to summer TV viewers.
Investors in tobacco industry companies benefit from their profits. But what are they doing investing in the tobacco industry, complicit in an indisputably criminal activity?
Many of us, typically, courtesy of our funds' managers, are beneficiaries of the takings of bank illegality. This is the point of “green” investment portfolios. Get ethical or get out. Direct bank shareholders have been happy to rake in the dividends year after year, possibly also the capital gains, while declining to look under the bonnet. The era of considered neglect is over.
Finance sector parasitism
There is a deeper dimension to the general populace’s supposed benefiting from bank bad behaviour.
'… such high profitability involves gouging every borrower in this country. Every individual. Every business. Your super will suffer: Nonsense. By being the world's most profitable banks, they reduce profitability across every other Australian business. Those "other businesses" constitute the bulk of every super fund's investments. It's like petrol. Increase the price and yes, petrol companies make more money, but every other business makes less.'
Quite. Bank share ownership is delivering us booty from other sectors, which lowers the returns from those sectors to that same retirement package.
One can also speculate that a member of one’s extended family has a foreclosed business or farm, is unemployed, on welfare payments, or on the public pension because of bank predation against other sectors, which lack contributes to community deprivation. Put all that on the debit side of the ledger.
I have been pushing the crude statistics on this matter for some time. Witness my article on “financialisation” of economies, originally in New Matilda, in June 2010 (note the cached table).
After the financial year 1980-81, the year of the 'Campbell Report' and the beginning of financial deregulation in earnest, finance sector income was 5% of corporate income and 3% of total business income.
After 2016-17, the figures have climbed to 23% and 16.7% respectively. At the March quarter 2016, the figures peaked (for the moment) at 25.1% and 17.9%. That is, almost a quarter of corporate income and a sixth of business income is taken by the finance sector. (The figures are from ABS, Australian National Accounts, National Income, Table 7).
The lender-borrower relationship
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will not get to the root of the problem unless it confronts the nature of the relationship between bank lender and small business/farmer and investors in retail housing or through bank “wealth management” services.
The lender-borrower relationship, especially for small to medium farmer-borrowers, is highly asymmetric. The bank lender holds all the cards. I have covered this issue briefly in my submission to the 2017 Senate Consumer Protection Inquiry.
The credit contract is a complex instrument — in particular, it is open-ended. The open-ended contract is of extended duration and its terms are subject to alteration. Some legal academics have termed such an arrangement an “incomplete contract”. The employer-employee relationship has long been acknowledged as such an animal, leading to the establishment of separate jurisdictions and specialist expertise. To a lesser extent, but appropriately, it has been applied to the franchisor-franchisee relation.
Legal scholars, to my knowledge, have failed to apply the idea of an incomplete contract to the lender-borrower relationship and to elucidate its significant regulatory implications. The formal education of the legal profession, from which is drawn the judiciary, is centred on the holy writ of the law of contract as if the lender-borrower relationship is akin to the one-off exchange of a pallet of potatoes. Scandalous really.
With such an inbuilt asymmetry of power, the bank lender cements its leverage in the contract terms. Fundamentally, the bank seeks to shift the inherent risk associated with any credit contract wholly to the borrower. The taking of security on borrower assets, enhanced by borrower (or related party) guarantees, is the basic means by which risk is shifted.
Other control mechanisms put the borrower under further subjugation that extends into the realm of unconscionability and fraud. The Australian banks have used this full range of mechanisms over a long period of time with complete impunity.
Mechanisms that fit into this category include:
- withholding of the full completed contract from the borrower;
- “suspension” and “preservation” clauses in a contract that subordinate borrower litigation rights to bank discretionary plunder;
- contracts repayable at call (the standard overdraft contract, but on occasion term loans);
- unsuitable loan facilities (as below);
- usurious penalty interest rates and other discretionary fees;
- “non-monetary” defaults — where the lender decides arbitrarily that the industry in which the borrower operates is subject to (or likely to be subject to) market deterioration, and defaults the borrower on that account;
- customer asset devaluations — where a lender obtains from a compliant valuer a significant devaluation of customer assets, leading to an unacceptable loan to valuation ratio which, in turn, provides the bank with a “legitimate” cause for defaulting the customer; and
- the sale of foreclosed customer assets undervalue.
A key dimension of the asymmetry of the lender-borrower relationship, especially involving small to medium enterprise (SME) farmers, is the imposition of not ideal loan facilities on the borrower. The bank, by virtue of the short-term nature of the bulk of its funds, prefers short-term facilities. The SME farmer borrower, lacking access to sufficient equity, prefers medium to long-term facilities.
The bank’s preferred option these days is the bill facility — a facility developed for corporates and pushed into other business domains. The bill facility – never adequately explained and which few SME farmer borrowers understand – has to be turned over regularly within fixed timelines. This turnover requirement allows the lender to alter the terms of the bill on a regular basis.
In addition, interest on the bill and fees are paid up front. The family farmer is at a particular disadvantage, with seasonality of revenues and uncertainty linked to weather patterns. Farmers and SMEs will be forced to take out fixed-term bills that don’t match their income and expenditure flows, meaning that they will be paying interest and fees on unused funds. Borrowers are also forced to manage their pool of bills that expire at different periods.
The bills will be accompanied only by a minimalist overdraft. The bill facility, “sold” to the customer as providing maximum customer convenience, has been anything but.
Before the banks’ blanket pushing of the bill facility, the overdraft provided significant flexibility. Farmers – say, with a $100,000 overdraft limit – might have a hardcore debt of $25,000 and a great margin of flexibility to confront income to expenditure variation. Interest was paid on actual debt and belatedly.
During the 1970s and early 1980s, the NAB reduced the overdraft interest payment periods from six months to three months, and to one month in 1983. The bank also dramatically reduced overdraft limits and eliminated the previous margins that facilitated borrower flexibility.
These changes were being imposed at precisely the time when rural “experts” were advising farmers to “get big or get out”. Coupled with the massive interest rates of the 1980s, one can readily see why the number of family farmers collapsed between the '70s and '90s.
The typical bank loan facilities for SME farmers are thus not fit for purpose. They are in themselves a vehicle ripe for predatory lending.
Lending establishments that catered specifically to farmer needs have been abolished or privatised (see below) in the post-Campbell Report era of financial deregulation. The perennial rationale offered has been that private sector providers, via competition, will service all borrower needs. A huge lie of course, as the de facto banking cartel makes loans to small business and the farming sector on its own universally onerous terms. Such borrowers now have no alternative.
The category of predatory lending deserves greater exposure, now generally hidden from view. Bank lending officers may ascertain that a small farmer borrower or retail housing investor does not have a viable proposition for sustainable principal and interest repayments. Yet they take security and plan, ab initio, to default and foreclose when the irregularity of payments inevitably arises.
This practice is widespread — an integral part of the banking trade. In the retail housing investor domain, predatory lending (especially to “asset rich, income poor” older people) was exposed in the Storm Financial scandal. It is the speciality of the Banking & Finance Consumers Support Association’s Denise Brailey. Brailey insists, given the information gathered from those who contact her for assistance, that the practice remains an underreported racket in Australia.
The bank (typically a “reputable” household name) plays gangster, weaponising its licensed banking operations. Facilities are oppressive, the full contract is withheld from the customer, customer details are fabricated, signatures are forged and so on.
Royal Commission personnel will receive countless instances of bank malpractice against customers. I suspect that what will not happen is a forensic pursuit into the proximate causes and root cause of this extensive malpractice — save, perhaps, for an attribution to some vague notion of a dysfunctional culture which has arrived from sources unknown. The heavies, uncharacteristically, have already pronounced on the problematic “culture” in 2015, with no impact whatsoever. Hot air — which serves as an end in itself.
The institutions to offset the asymmetry of bank power are themselves negated
Ironically, the asymmetry of power between bank lender and borrower/investor has been acknowledged in the establishment of various institutional arrangements to partially moderate overarching lender power.
Such has been the case during the 19th Century and early 20th Century development of alternatives to private profit-oriented banking — mutualist credit unions and building societies, and government-owned banks.
Such has been the case with the rise of equity courts – paralleling common law courts in English law – in which the dominant party’s abuse of power in its pursuit of naked self-interest is constrained under the rubrics of “fiduciary duty”, “duty of care” and so on.
Such is the case with:
- the establishment of the Code of Banking Practice in the 1990s;
- an “external dispute resolution” mechanism — beginning with the Banking Ombudsman in the late 1980s, now the Financial Ombudsman Service;
- the creation of ASIC, out of the ASC in 1998, to provide more comprehensive oversight for vulnerable financial services consumers; and
- farm debt mediation services in several States.
All these institutions have been successfully neutered, evidently not by accident. Government-owned banks have been privatised or abolished — given “legitimacy” by the 1979 Campbell Inquiry. Only a handful of mutualist credit unions have survived the powerful ideological pressure for demutualisation and privatisation.
With regard to rural sector specialist banks, the iconic Commonwealth Development Bank (another SME lender) was abolished in 1996. The Primary Industries Bank Australia (PIBA) was sold off to the Rural & Industries Bank of Western Australia (R & I Bank) in 1987-88 — a cynical measure by Federal and State Labor governments with the R & I Bank on its way to privatisation as Bankwest. PIBA’s loan book was subsequently sold to Rabobank in 1994. The Australian Wheat Board’s Landmark was sold to ANZ in 2009. And the Victorian Rural Finance Corporation was sold to Bendigo and Adelaide Bank in 2014.
Regarding the courts, a key Australian banking law text (Tyree & Weaver, Weerasooria's banking law and the financial system in Australia, 2006, p488) claims 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.’
With the law of the marketplace being the law of the jungle, the courts will continue to act on the presumption that parties to a credit contract are necessarily outside the domain of equity and, indeed, outside the domain of unconscionable conduct.
The Code of Banking Practice has been a sham from the start. I outline briefly the Code’s history in a 2013 article on the Priestleys v NAB. In particular, I highlight the transparently corrupt moment in 2003 when small business is belatedly incorporated into the Code, only to have the banking cartel devise a means to secretly render the Code inoperative.
The Code has been modified since 2003-04. In a seminal judgment in March 2015, NAB v Rice, the Code has been reified as having contractual status. But, in my opinion, the Code remains as a public relations exercise with minimal impact on bank behaviour.
Regarding the Financial Ombudsman Service (FOS), on other than minor disputes it is either incompetent or corruptly complicit with its bank funders. I have outlined this charge in my submission (no 295) to the 2013 Senate Economics Committee ASIC Inquiry, and in my submission to that Committee’s 2017 Consumer Protection Inquiry.
The newly created ASIC was handed powers over unconscionable conduct in financial services, incorporated in the Act’s s12C. Following a Parliamentary Inquiry and report appropriately titled 'Finding a Balance: towards fair trading in Australia', an amendment covering “business to business” unconscionable conduct (that is, corporate predation over SME farmers) was inserted as s51AC in the then Trade Practices Act. Coverage of such unconscionability in financial services was separated out and handed to ASIC in an expansion of the Act’s s12C in 2001.
ASIC has aggressively denied its responsibility in this crucial arena. In July 2004, Alan Fels, chairman of the Trade Practices Commission (ACCC) during 1991-2003, claimed that the relocation had been a disaster and urged that unconscionability in financial services be handed back to the ACCC. Thus there is no action against such abuse, in spite of the formal existence of a legitimating statute.
In addition, ASIC also has formal oversight over FOS, has done nothing regarding FOS’ partisanry and is complicit in FOS’ complicity with bank malpractice.
‘It has levelled the playing field from being heavily in favour of the banks to giving farmers and people on the land some semblance of a fair go.’
Unfortunately not so. The Act was subsequently weakened and the banks have subverted the independence of the mediation process.
The point here is to make a novel observation. Structures are established specifically to offset the banks’ preponderant power but are, over time, systematically undermined. This undermining across all these arenas is transparently a strategic act. The banks’ intrinsic power is being dynamically reinforced and reproduced as a matter of principle. Thus is a mafia at work to perpetrate crimes against financial sector customers and to inhibit redress against those crimes.
As with the character of the lender-borrower relationship, will this significant supplementary dimension be grasped by the Royal Commission personnel? One expects not.
Read Part Two of The Clayton’s Banking Royal Commission: More of the same.
Read Part One of The Clayton's Banking Royal Commission.
Dr Evan Jones is a retired political economist.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
The good news. Subscribe to IA for just $5.