3 things we learned from the banking royal commission interim report

Greedy bankers, profit-driven corporates and a poorly resourced corporate regulator: Australia's scandal-ridden financial system.

Fix the banks

"The pursuit of short-term profit at the expense of basic standards of honesty."

If you're looking for the words to describe what's been going on in our financial system in the last few decades, you could do worse than those used by banking royal commissioner Kenneth Hayne QC, in the opening paragraphs of his interim report.

"Why did it happen?" Justice Hayne asks about the litany of crimes his inquiry has uncovered. "What can be done to avoid it happening again?" The first question has a simple answer – because those that did it could get away with it. The second will be debated long after the royal commission delivers its final findings.

Much of the thousand-page report distils how thousands of instances of misconduct by banks, insurers, brokers and intermediaries occurred. It points the finger at two culprits: a culture of greed in our financial system, and acquiescent regulators unwilling to duke it out with corporate behemoths in the courts.

Here are our three key takeaways from the banking royal commission's interim report:

  1. There's a culture of greed at the heart of our financial system.
  2. There's no tough cop on the beat.
  3. 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 died.

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 notices.

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 are minimal.

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 industry."

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.