Here are our three key takeaways from the banking royal commission's
- There's a culture of greed at the heart of our financial system.
- There's no tough cop on the beat.
- There's going to be some changes around here.
There's a culture of greed at the heart of our financial system
"The banks have gone to the edge of what is permitted, and too often beyond
that limit, in pursuit of profit," Hayne writes. One crime that was
particularly widespread was "fees for no service". In another industry this
might be called fraud, or theft.
Customers might find themselves paying fees for no service when their
original financial adviser left the company, transferring their client list
to another adviser, who wouldn't actually do any work for the client. The
company kept charging these "orphan clients" fees. In other cases, advisers
might (wrongly) treat these recurring fees as trailing commissions for some
service they had already provided, instead of ongoing payment for an
ongoing service. Sometimes fees were charged for years after the client had
If an adviser was pulled up on it by the bank (which had profited from the
illegally charged fees), they weren't fired for dishonesty but simply
warned not to do it again. It appears the big banks had no systems in place
to stop their customers being charged for no service, or even to figure out
whether it was happening. In the case of AMP, the company made a deliberate
decision to keep charging clients for no service.
"Charging for doing what you do not do is dishonest," Hayne writes,
helpfully putting the words in bold for any advisers who missed the memo.
"No-one needs legal advice to tell them that. The root cause for what
happened was greed."
With limited competition in the sector, big banks evidently feel their
reputations can take a few hits. CBA for one has got the public mea culpa
down to a fine art in recent years. If public goodwill means nothing,
shouldn't the possibility of heavy fines or serious jail time be an
incentive to behave?
There's no tough cop on the beat
If Ned Kelly had been a dodgy banker instead of a bushranger, he would
never have needed that armour. Hayne calls out the corporate regulator, the
Australian Securities and Investments Commission (ASIC), for its soft-touch
approach to law enforcement – specifically, its practice of negotiating
with the crooks about their penalties.
ASIC is yet to have anyone charged with a crime for taking fees for no
service. Nor has it charged anyone for failing to report breaches of the
law within the required ten days. Instead of taking companies to court,
ASIC hands out a lot of 'enforceable undertakings' and infringement
Enforceable undertakings are "heavily negotiated" deals in which a business
agrees to stop some illegal behaviour that ASIC has raised "concerns"
about. The company may also pay a fine and refund customers. Considering
the revenue the big banks take in, these amount to little more than a slap
on the wrist.
In the last decade penalties from infringement notices to the major banks
amounted to less than $1.3 million. It's clear this is a result of banks
haggling with ASIC about appropriate fines. An ASIC enforcer told the royal
commission that if they'd decided to take a big bank to court, they would
have been pursuing them for a much greater penalty than they'd agreed to in
the enforceable undertaking.
Paying a fine is not considered an admission of guilt or wrongdoing. Once
the enforceable undertaking is agreed to, then the law prohibits either
ASIC or the Commonwealth Director of Public Prosecutions from taking civil
or criminal action against the company. The consequences for doing wrong
Hayne points out that while ASIC has more powers up its sleeve than it
tends to use against dodgy operators, it is reluctant to commit the cost
and time needed for a drawn-out court case. It has limited resources and
needs to make tough decisions but, Hayne writes, "I do not accept that the
appropriate response to the problem of allocating scarce resources is for a
regulator to avoid compulsory enforcement action and instead attempt to
settle all delinquencies by agreement."
There's going to be some changes around here
It's clear that personal and institutional pursuit of profit has led banks
to break the law and exploit their customers. Can we expect a less shonky
finance sector after the royal commission? Time will tell. In the meantime,
Australia's biggest institutions appear to be hard at work cleaning house
ahead of the royal commission's final report, due early next year.
With guilty consciences, banks have changed or ditched dodgy products just
days before they were due to be examined at the royal commission. The
Australian Banking Association has recently decided to update its Banking
Code of Practice, to make it crystal clear that charging fees for no
service is not on. The timing is no coincidence.
Hayne explodes the "just a few bad apples" excuse the banks trot out every
time they get caught with their hand in the till. Pinning illegal behaviour
on just a few staff, he writes, "ignores the root causes of conduct, which
often lie with the systems, processes and culture cultivated by an entity.
It does not contribute to rebuilding public trust in the financial advice
The interim report makes no recommendations, but does raise questions to be
addressed in the royal commission's final hearings. Do laws need to be
changed? How can we make the system work in the interests of customers?
Some solutions are obvious: more resources for regulators, compensation for
victims of the banks, and fines big enough to act as a deterrent. The
government might listen to the findings of the royal commission, but in the
meantime Australians have a golden opportunity to make it clear what they
expect from their banks.