Perhaps the biggest surprise about the reaction to the Royal Commission into the banks is that anyone is surprised. Banks are by their nature parasitic, and the discovery that they are treating their customers as prey to be exploited whenever possible should shock no-one. It is the institutional position of power that financial institutions enjoy – and we put them there.
The Commission is doing a good job of showing up some deeply unethical behaviour but the comments about the need to change corporate ‘culture’ so as to improve matters miss the point. Steeper penalties might help, but don’t expect anything from the insipid regulator, ASIC. For decades, Australia’s corporate regulators have had a ‘culture’ of being about as fearsome as a wet lettuce (one remembers, for example, the charmingly ineffective Henry Bosch, former head of the NCSC in the 1980s, who was utterly outplayed by the entrepreneurs).
The media, with the outstanding exception of Age and ABC journalist Adele Ferguson – very much the exception that proves the rule – have only come to the party when there was no other choice. John Durie, Andrew Bolt, Terry McCrann, Simon Benson, the AFR’s Chanticleer columnist Tony Boyd, the AFR itself, Judith Sloan and Ross Greenwood all decried the Commission and for once somebody has done some remembering in the media.
Again, this should be no surprise, and certainly does not come as a shock to this business journalist. The (well remunerated) job of high profile business journalists is to be stenographers for corporate Australia; access is provided in return for soft coverage. In particular the AFR has for decades been a propaganda outlet for the banks and the big end of town.
What is unlikely to come out of the Commission is an understanding of the deeply systemic problems that the financial system has created, and how dangerous it is becoming. The lessons of the GFC are not even close to being learned.
One hint of just how deep the problems go is the Future of Financial Advice (FOFA) legislation, introduced under the Labor government in 2012. That such legislation had to be introduced was extraordinary. It stipulated that financial advisors put their customers first. What other business would have to be told to do this? It shows just how different the finance business is, and it is quite clear from the current revelations that many have paid little attention to putting customers first (especially if they happen to be dead and can still be charged fees).
It might be added that the whole idea of value in financial advice is deeply suspect. Investment advice is really a selling activity disguised as something else.
There is considerable evidence, collected over decades around the world, that financial advice does not provide higher returns to clients. Almost no fund managers exceed the market average over time, and the more they are paid the further below the average they fall. The best strategy for most investors is to go into an index fund and diversify the asset types in order to capture the average market return. Legal advice is also required, but that can usually be sought from an accountant.
The scale of this scam is not trivial, especially in the super industry. The Federal Treasury estimates that fees in the superannuation industry, which benefits from a mandatory 9.5 per cent influx each year, are running at $21 billion annually. According to the Treasury, that is about three times what it should be. Later estimates put it at $31 billion.
Again, no surprise. The underlying problem, which the Commission will not consider, is captured in the decades-long mantra of the need for ‘financial de-regulation’. This is an oxymoron. Finance consists of rules, so the rules cannot be removed.
It was a brilliant scam by the finance industry. It allows the industry to make up its own rules, and to demonise any attempt by governments to govern as inefficient and an attack on free enterprise. The sheer recklessness of allowing that to happen was played out in the GFC but nothing has fundamentally changed. Governments have stopped governing, and financiers have become our de facto rulers. Finance, which is Australia’s largest industry sector, should not be seen as part of the economy, but a cost on the economy (something Adam Smith understood well). There is a strong argument for not including finance, real estate and insurance in GDP because although it generates transactions it produces nothing of value.
If we were to do that, it would at least show how weak Australia’s economy really is and how big a drag the banks and the financial system are on the rest of the country. But that will not come out of the Royal Commission.
David James is the managing editor of businessadvantagepng.com. He has a PhD in English Literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare’s ghost.