A common thread runs through the world’s modern banking scandals.
Greed – unbridled, incentivised, and unchecked by timid regulators – unites them all. You can see it in the worst excesses of the global financial crisis. It’s there in the post-2008 Irish collapse, and more recent revelations about shocking misconduct by Californian banking giant Wells Fargo.
Greed was omnipresent as the scandals played out before Kenneth Hayne and his royal commission. Billing customers for no service. Charging the dead. Opening fraudulent Dollarmite accounts in children’s names. Giving executives bonuses of 300%. Lending in a way that crippled the disadvantaged and unemployed. Greed, every time.
There’s nothing remotely revelatory here. It’s a point made, time and again, by inquiries into banking malfeasance. But it continues to pose the ultimate test to those charged with reform. How best to temper a compulsion that has repeatedly pushed bankers into misconduct?
This time, it’s the Coalition faced with the question. It will receive Hayne’s report on Friday and announce its response on Monday, at 4.15pm.
Early indications are that Hayne will recommend a fundamental reshaping of Australia’s financial system. Never before has there been such a groundswell of public support for change. Never has the evidence been more compelling. After 68 days of hearings, 134 witnesses, 400 witness statements and 6,500 documents, it appears clear to Hayne that greed is behind much of the rot.
“Why did it happen?” he pondered in his interim report. “Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?”
There are likely to be recommendations to end excessive bonuses, reduce CEO pay, overhaul sales commissions and targets, bolster the regulators with new funding and powers, and end the banks’ control of mortgage and financial advice arms.
The RMIT corporate governance expert, Andrew Linden, and his colleague, Warren Staples, have spent much time considering how best to curtail greed. A failure to do so, they say, will simply lead Australia into another banking scandal in 15 years’ time.
“It’s not a question of excluding [greed], because you can’t do that,” Linden says. “But you need to design the regulatory environment and the governance of the financial institutions themselves in a way that is going to restrain it as much as possible.”
Linden says lasting reform can only be achieved with fundamental changes to the sector.
Boards should be restructured from a profits-focused, one-tier structure to a two-tier board model, as used in Germany. Here, a supervisory board and a managerial board operate in tandem. The supervisory board includes union and employee directors, creating a layer of internal accountability.
“By having union and employee directors on their supervisory boards, they have internal and industry eyeballs on the managers, so the ones who are actually primarily responsible for systemic misconduct,” he said.
Linden and Staples propose giving bank customers – those who are victim to the banks’ excesses – and consumer advocates some oversight role, through a body coordinated by the regulators.
“Having for example, the consumer action law centres representatives more actively being part of the regulatory oversight process might actually help contain that kind of systemic misconduct.”
Not-for-profit banks ought to be encouraged, to reduce the primacy of the shareholder-focused big four.
The Consumer Action Law Centre believes there must also be an independent oversight body to monitor the implementation of Hayne’s recommendations. Its chief executive, Gerard Brody, says greater ongoing public oversight of the banks themselves is also needed, perhaps through added parliamentary scrutiny.
“The parliamentary committee oversight of big bank chief executives is a good start, and perhaps this could be expanded,” Brody said. “As part of this, CEOs and chairs of the big banks should regularly account for how they have met their purpose, with questioning from MPs and other independent experts.”
Brody sees improvements to lending standards as an area of critical need. The royal commission heard repeated examples of banks lending to those who had no chance of paying them back.
Commission-based selling for mortgage and finance brokers should also abolished, Brody said.
“Commission-based selling and remuneration is the key culprit, and industry efforts to self-regulate have failed – the Banking Association’s own review by Stephen Sedgwick recommended delinking commissions from the size of the loan, but this has not occurred,” he said.
Brody also believes that point-of-sale intermediaries like car dealers should not be exempt from finance licensing requirements. In short, he believes that people working in places like car yards – who have no expertise in finance – should not be pushing credit.
“The royal commission demonstrated evidence of car dealers taking no effort to investigate the suitability of a loan whatsoever,” he said. “This exemption needs to be abolished.”
For all the scandals revealed in the banking royal commission, many say it has barely scratched the service. Federal Labor said the royal commission needed more time to do its work. Victims of the banking industry say there are many more crimes yet to be revealed. Peter Brandson, a campaigner who set up Bank Reform Now, said last month that the most serious conduct by the banks had gone unexplored.
“Even now the royal commission is not looking at the most serious offences,” he said. “There has been criminal fraud, forged documents, asset-stripping and millions of dollars of assets have been taken from people.”
Brody believes a key plank needing reform is redress for victims, both to keep the banks accountable and better compensate customers affected by misconduct. Public redress mechanisms, rather than internal bank remediation programs, should be established.
“When a bank provides an irresponsible loan, the legal remedy is generally wavier of fees and interest,” Brody said. “The bank can still collect the debt, leaving people in financial difficulty. This is unfair, consumers should be entitled to greater compensation to recognise hardship and this should include waiver of loans in appropriate circumstances.”
Monday will tell us just how far the Coalition will go in overhauling the financial system. Has the government listened? Has it moved past its early reluctance to go after the banks?
“I don’t think they quite understand how angry a lot of voters are about what the banks have been up to,” Linden says. “It’s not just customers. One of the consequences of not properly constraining greed in banking is that the public picks up the tab when the music stops. That happened in Ireland. The cost directly to the public purse there was huge. Their GDP was absolutely smashed.
“It’s not just the customers that pay in the end, it’s the wider community, if the greed’s not contained.”