In the wake of the Hayne royal commission, the big banks’ share prices rose, raising questions of how much the culture of greed is threatened by its recommendations. By Karen Middleton.
Hayne’s ‘disinfectant’ sees banks’ share prices rise
In December, amid all the publicity surrounding the financial services royal commission and the resultant tightening of lending practices, I expected at least a basic interrogation when I applied to increase my home loan.
I did not expect that one of my bank’s “digital” lenders would demand documents detailing my superannuation when he phoned to follow up the online application.
When I queried this, he agreed they weren’t essential.
During our conversation, though, he changed his mind and began to forcefully insist I provide the documents.
His tone raised a red flag and I declined, suggesting he forward the application to the credit approval team and come back to me if they needed anything more.
He also asked for documents outlining my home and contents insurance. After more hesitation, I decided to acquiesce. The bank does, after all, have an interest in the house.
But it turned out my suspicions were well founded.
After days of silence, the lender sent an unsolicited quote for his bank’s own insurance products. When I protested, he admitted he had delayed forwarding my loan application to the approvers for assessment while he generated the quote.
The lender confirmed he’d intended to do the same with my superannuation had I also sent those documents, which weren’t needed for the loan application.
I rejected his insurance offer and, once the loan increase was approved, lodged a complaint with his manager.
Despite a year of scarifying public evidence about the behaviour of Australia’s financial institutions, culminating this week in royal commissioner Kenneth Hayne’s excoriating report, it seems there are still those in the banking system who remain oblivious to the gap between the way they behave and what customers are entitled to expect.
As it happens, this bank employee, who appeared to be in line for commissions on sales, works for a bank in the Westpac stable – the only one of the Big Four banks that Commissioner Hayne spared from referral for possible charges of misconduct, although not from strong criticism.
Hawking superannuation and insurance products will soon be banned.
That is among Hayne’s 76 recommendations, all of which, bar one, the government says it will implement.
In his report, the commissioner argued that trying to flog a financial product unsolicited – that is, to someone who has not inquired about it – should be unlawful. The government accepts this.
Hayne added a specific recommendation that funeral insurance, currently and inexplicably not defined as a financial product, should be included and newly covered by consumer protection law.
Hayne recommended financial institutions be made to review their pay arrangements for frontline staff annually, to focus “on not only what staff do but also how they do it”.
He also endorsed the findings of a 2017 review of sales commissions in banking and finance by former Australian Public Service commissioner Stephen Sedgwick, who said incentives should no longer be paid to retail staff based “directly or solely on sales performance”.
Kenneth Hayne’s three-volume report examines financial institutions’ operations at both the front and back ends. It eviscerates how the banks currently deal with customers and describes a greedy culture that normalises putting personal and institutional profit – and shareholder values – before the needs of the people and businesses they’re supposed to serve.
After the report was made public on Monday, the Australian Banking Association’s chief executive, former Queensland Labor premier Anna Bligh, expressed the industry’s contrition and praised Hayne and his team for their “rigour, hard work and diligence”.
The Saturday Paper asked Bligh why it had taken a royal commission to force the banks to acknowledge they had been treating their customers poorly.
She said the commission had brought sunlight – “the best disinfectant”.
“It’s when an industry or an area of activity sees its own behaviour through the lens of somebody else – in this case, a royal commission and, through that royal commission, the eyes of the public – that it really starts to understand how behaviour that seemed quite normal and industry practice is in fact anything but,” she said.
It remains unclear why persistent past complaints, protests, legal challenges and even suicides allegedly linked to financial despair did not deliver the lightbulb moment sooner.
That Bligh’s association quietly changed its name from the Australian Bankers’ Association just two weeks before the commission’s first hearings in March last year suggests it was alive to the fact those it represents had an image problem.
The governor of Australia’s Reserve Bank, Dr Philip Lowe, endorses Hayne’s view that at some point, greed became the prevailing motivator.
“Why did this happen? I think there was a very clear focus on sales rather than service,” he told the National Press Club on Wednesday.
“I mean, at the end of the day, finance is about providing services to people, but many financial institutions have focused on selling product.”
Lowe blamed sales commissions, at least in part. He suggested the long-time stability of the Australian banking industry may, perversely, be behind the problem. Profitable banks, he said, do not engage in introspection.
“I think in countries where they’ve had banking crises, there have been more fundamental reviews of the way banking is done,” he said. “In Australia, our banks, thankfully, have been profitable for decades, but it’s likely that that generated a sense of hubris. They focused on selling product rather than delivering services. And I think they understand that now.”
Lowe called the royal commission’s recommendations sensible, balanced, pragmatic and necessary.
“It’s not revolution – which we didn’t need.”
Revolution would have meant ending what’s known as vertical integration – banks’ ability to offer insurance, superannuation and investment advice, as well as loans and deposit options.
Critics of the current system argue it creates a potential conflict of interest between the banks’ best interests, which involve selling more product, and those of the customer.
The banks feared ending vertical integration would be part of Hayne’s blueprint for change, an upheaval that would have required massive divestment and restructuring, especially for the big four: Commonwealth Bank, Westpac, National Australia Bank and ANZ.
When it wasn’t, the banks’ share prices shot up between 4 and 7 per cent on Tuesday, albeit off sharp falls throughout last year.
AMP, the institution that arguably fared worst as the royal commission’s hearings unfolded, saw its share price bounce back 10 per cent. It recovered some of the losses of a horror 2018, in which its chairwoman, chief executive and group counsel and several board members resigned following revelations it misled the corporate regulator and changed a report into a fees-for-no-service scandal.
As banking insiders describe it, the share price rises reflected the industry’s response to Hayne’s decision not to tear them apart – “phew”.
Some commentators, the federal Labor opposition and the Greens are curious about a $500 million splurge on bank shares observed on the Australian Stock Exchange about 11am on Monday, well before the release of Hayne’s report.
The buy-up came two hours before media representatives and some stakeholders were given embargoed access to the report in a secure lock-up and more than five hours before it was made public.
Estimated to have netted about $22 million in profit the next day, it has raised speculation about possible insider trading.
The opposition’s financial services spokeswoman, Clare O’Neil, has asked the secretary of the Department of Prime Minister and Cabinet, Martin Parkinson, to investigate whether a minister, adviser or public servant among those few who had access to the report from last Friday had leaked any of its contents.
But some analysts say it’s more likely general speculation about what the commissioner may or may not have been about to recommend, combined with a correction to nervous investors’ earlier short selling, was behind the early share price rise.
The Australian Securities and Investments Commission has indicated it is aware of the issue.
Treasurer Josh Frydenberg rejected any suggestion of a leak.
He welcomed Hayne’s report and pledged the Coalition government would “act” on all 76 recommendations.
“From today, the banking sector must change, and change forever,” he said.
Those recommendations include establishing a compensation scheme of last resort to cover payments to people who have lost money through bank misconduct. Frydenberg announced on Monday that the government would establish such a scheme immediately and contribute $30 million to compensate those who had already won legal cases against institutions that had gone bust.
Among other recommendations is an end to the practice of automatically deducting fees for financial advice from customers’ accounts – in some cases, while providing no advice at all.
Instead, banks will need to seek written annual authorisation and ensure quality advice is actually provided with any incentives or conflicts declared.
The commissioner also recommended ensuring that people entering the superannuation system have only one default account and that the banking code of practice be amended to better protect clients in remote areas or who speak little or no English, especially Indigenous people.
He proposed a new national farm debt mediation scheme and new rules for dealing with distressed agricultural loans.
Commissioner Hayne said further that standards governing executive pay should be improved to assess the handling of non-financial risks, not just profit.
The government has agreed to retain the existing two regulators, the Australian Prudential Regulation Authority and ASIC, but establish a new oversight body to ensure they fulfil their obligations.
Hayne criticised both agencies, particularly ASIC, suggesting they have tended to opt to negotiate with banks accused of breaches, rather than prosecute them. He said they should instead ask: why not litigate?
And he recommended that if a follow-up review determines ASIC is still not tough enough, the government should establish a new civil prosecutor, modelled on the Director of Public Prosecutions, to take over.
Among the commission’s most controversial proposals are those affecting mortgage brokers, including a new legal requirement that they act in clients’ best interests – not required currently – and a ban on the ongoing, or “trailing”, commissions they receive on brokered loans.
A third recommendation, the most contentious, that brokers should be paid upfront by borrowers, not lenders, is the only one the government is unwilling to implement at this stage.
“What we don’t want to do is to give a big tick – a free kick – to the banks,” Frydenberg said, noting other reviews had rejected the move because it would dramatically reduce competition.
A Credit Suisse analysis has shown the Big Four would save almost $2 trillion over five years combined if they did not have to pay mortgage brokers’ commissions.
Shares in broking firm Mortgage Choice fell almost 25 per cent on Tuesday.
The opposition has said it supports all of the recommendations.
It continues to criticise the government for its reluctance to establish the royal commission in the first place, accusing then treasurer now prime minister Scott Morrison of voting against it 26 times.
Opposition Leader Bill Shorten linked the issue to the light parliamentary schedule set down for the first half of the year – just three days next week with both houses in session followed by a week of house of representatives sittings while the holds its regular budget estimates hearings.
Shorten is seeking crossbench support for extra sitting weeks to allow the government to legislate Commissioner Hayne’s recommendations.
Shorten also alleges the government is colluding with business in the financial services sector via a parliamentary inquiry mounting a partisan attack on Labor’s tax policy. His comments followed conflict-of-interest allegations published this week by Nine newspapers involving economics committee chairman and Liberal MP Tim Wilson.
Wilson is holding an inquiry into Labor’s plan to abolish franking credits – rebates for shareholder retirees on tax paid by the companies they invest in – a plan the Coalition has dubbed a “retirement tax”.
Wilson has been accused of co-ordinating hearing dates and locations with distant relative and Labor critic Geoff Wilson, owner of Wilson Asset Management in which Tim Wilson is a shareholder, to facilitate protests outside.
Tim Wilson has declared his shareholding on the parliamentary register of interests but not during the inquiry hearings.
“We’re going to get to the bottom of this,” Shorten said. “… It smells, we’re not going to leave it lie.”
Scott Morrison has dismissed it as “mudslinging” rubbish and backed Tim Wilson, who denies any wrongdoing.
Ahead of the royal commission report’s release on Monday, Morrison defended his own previous insistence that it was not needed.
“As treasurer, you’re always going to be focused and you are going to be careful about what the potential impacts are on a financial system on which everybody’s livelihoods depend,” Morrison said. “…I was being very careful.”
On Tuesday, the Australian Council of Trade Unions released a series of documents obtained under freedom of information showing that in November 2017, on the eve of the government announcing the royal commission, National Australia Bank chairman and former Treasury secretary Dr Ken Henry had sent Morrison – then the treasurer – a draft of a letter the Big Four banks planned to release the following day, in which they would advocate for holding a commission. It was headed “for the purpose of discussion” and indicated their views on duration and terms of reference.
The ACTU said it proved the Coalition and the banks were too close.
After the royal commission report’s release this week, former prime minister Malcolm Turnbull said his government should have acted sooner.
“You can make a very good case for saying it was started perhaps a year later … or 18 months later than it should have been,” Turnbull said.
He said he and Morrison had wanted to rectify industry problems swiftly and were concerned a royal commission would create delays.
He said anyone who had committed offences should be charged and the banks had to change their culture.
“But the question is: will it happen? You know, changing the culture of big organisations is hard.”
The culture at NAB is likely to change swiftly, following announcements late on Thursday from chief executive Andrew Thorburn and chairman Ken Henry. Thorburn is stepping down and Henry is bringing forward his retirement.
Their departures, announced after the markets closed, followed direct criticism of both men in Kenneth Hayne’s report.
Hayne singled out the culture at NAB for detailed criticism, singling out Henry and Thorburn among all bank executives for explicit condemnation.
“I am not as confident as I would wish to be that the lessons of the past have been learned,” Hayne wrote.
He said he was “not persuaded” that NAB was willing to accept responsibility “for deciding for itself what is the right thing to do and then having its staff act accordingly”.
Hayne said Henry seemed unwilling to accept criticism of the board’s management and that Thorburn treated fees-for-no-service issues as “nothing more than carelessness” and “system deficiencies”.
He also noted that in the same week the executives were giving evidence, NAB’s bankers were being urged to sell five mortgages each before Christmas.
“Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains,” he said.
But although some interpreted Hayne’s stinging critique as a signal NAB needed new leadership, its board initially backed the incumbents.
Thorburn cancelled his long-service leave, due to begin the day after the report was handed down, and did a run of media interviews, insisting he was “contrite” and committed to change. But he disputed Hayne’s description, saying it was “the polar opposite” of what he is.
As the week progressed, Thorburn’s confidence that he would retain his job appeared to diminish.
On Thursday, Nine newspapers reported police are investigating allegations that Thorburn’s former chief of staff, Rosemary Rogers, may have misappropriated $500,000, including further allegations poor oversight may have enabled fraud.
In the statement late on Thursday, Thorburn said he had always acted with integrity but understood that NAB wanted change.
“I acknowledge that the bank has sustained damage,” he said. “… As CEO I understand accountability and I have always sought to act in the best interests of the bank and customers.”
Henry said he would stay on until a new chief executive is appointed.
“Andrew and I are deeply sorry for this,” he said of failing to meet customers’ expectations.
On Monday, Ken Henry had fired back at Hayne’s criticisms with a short, written statement.
“I am disappointed that the commissioner formed this view,” he said. “I know that it is not so. The board and I have reflected deeply on those and other issues and, as I have said previously, we take them very seriously.”
Henry said NAB accepted it would be judged by its actions.
But by Thursday afternoon, he too was quitting.
Both Scott Morrison and Bill Shorten had upped the pressure on the men, noting Hayne’s rebuke.
“I think Commissioner Hayne was pretty sharp in his assessment and I think that gives them a lot to reflect on,” Morrison said.
Ahead of the NAB changes, Reserve Bank governor Philip Lowe said bank customers also need to take responsibility for improving their own circumstances.
Lowe confirmed that the Australian banks are more profitable than most comparable overseas counterparts because Australians don’t seem to shop around for better deals.
He urged borrowers to do more themselves to promote both competition and accountability.
My own query and subsequent complaint about the aggressive lender prompted a verbal apology from his manager and the comment that he was new and would be “counselled”.
It seems in future, they’ll have to do more than that.
This article was first published in the print edition of The Saturday Paper on Feb 9, 2019 as "The pain in Hayne stays mainly in...".
A free press is one you pay for. In the short term, the economic fallout from coronavirus has taken about a third of our revenue. We will survive this crisis, but we need the support of readers. Now is the time to subscribe.