How did it come to this?
How did we arrive at a situation where banks and financial houses slugged dead people with fees?
Where billions have been sucked out of Australians’ retirement savings by bank-run super funds profiting at their members’ expense?
Where many vulnerable people were doled out credit they could never afford?
Where households live with an unprecedented debt burden fuelled by lax lending standards that inflated a risky property price bubble?
After months of exposés, the banks and regulators will now face the fallout from the Hayne royal commission’s final report; but the truth is there are many culprits, and the poor conduct and culture were decades in the making.
The genesis goes back to the 1980s and 1990s when Australia shifted from a world where banks were tightly controlled and credit was rationed, to a world where credit was free and easy, and banks — embracing an aggressive sales culture — flogged products to make money.
Alongside the floating of the dollar and the dismantling of tariff walls, the deregulation of banking was one more step in the liberalisation of the economy during that era.
To be sure, there were many benefits from these reforms, which have enhanced peoples’ material wellbeing and helped Australia withstand economic shocks.
Few would want to go back to the old, closed economy, or the culture of credit rationing where the bank manager’s job was to say “no” most of the time.
But some of the core assumptions behind banking deregulation were deeply flawed.
In the late 1990s, I interviewed the then head of retail banking at the Commonwealth Bank about concerns staff held that they were increasingly required to push bank financial products that customers couldn’t afford or didn’t need, rather than deliver genuine customer service.
Years later, scandalous behaviour at the Commonwealth Bank — where staff motivated by commission payments put peoples’ money into high-risk investments and lost their life savings — provided one catalyst for the royal commission.
The bank executive’s pet phrase lined up well with the prevailing political and economic philosophy of the time.
Politicians and policymakers assumed that freeing up the finance sector and unleashing “choice” and “competition” would be in the best interests of customers.
They underestimated the extent to which peoples’ best interests would be forsaken by the finance sector in its pursuit of profit.
In Commissioner Kenneth Haynes’s words: “Too often the answer seems to be greed — the pursuit of short-term profit at the expense of basic standards of honesty.”
People knew about fees for no service for years
Yet from early on, the signs were there to see.
As scandal after scandal was unearthed at the royal commission hearings, there was understandable public outrage and concern.
Yet to those of us who have covered and investigated the finance sector over the long haul, not a lot of it was new or surprising.
Take, for example, the charging of “fees for no service” — a practice the royal commissioner argued could amount to theft and potentially be subject to criminal charges.
“Fees for no service” is a perfect description of the business model that prevailed in the financial planning industry for years.
It was routine practice for financial advisers from the big banks or AMP to convince employers to place the compulsory superannuation payments they were required to make on behalf of employees into a super fund they were flogging.
In return for the sales success, the financial planner was given a cut of each worker’s super as a trailing commission, until the employee left the fund, died or retired. The fees were supposedly levied for financial advice that was rarely provided (and would likely have been corrupted by sales incentives if it was).
Money for nothing; nice work if you can get it.
The practice was widely known, exposed by journalists, and drew outraged comment from critics — yet governments chose to turn a blind eye.
Astoundingly, it was not until 20 years after the introduction of compulsory super that the practice was finally outlawed, albeit with existing commissions grandfathered.
Over the years, the competition regulator allowed the big banks to swallow up “wealth management” firms, turning the banks into vertically-integrated behemoths with a vast sales force at their disposal.
Tellers and call centre workers were referring customers on to financial advisers, who convinced them to shift their retirement savings into bank-owned super — and otherwise invest through the bank — often regardless of whether this was in the customers’ best interests.
Behind it all, targets, bonus payments and commissions that fuelled the sales effort … and corrupted the advice that customers received.
It was not until 2013 that financial advisers were finally required by law to put the best interests of the client first — ahead of profits and their own remuneration.
In theory at least. Last year, ASIC published the results of an investigation that found the “best interests duty” was being widely ignored.
Serving the interests of members is meant to be the sole purpose of super fund trustees, even funds run by banks for profit.
Yet such funds have paid hundreds of millions of dollars to the banks that own them — at the members’ expense — and had members’ retirement savings eroded by above-market fees the bank charges for in-house services, all with trustee approval. And zero action by regulators in response.
How has it gone on for so long?
Part of the problem is the tribal allegiances of Australian politics.
Senior Liberal party figures were fixated on the supposed wrongs of the not-for-profit industry super funds, despite lower fees and consistently higher performance overall in this sector.
Part of the reason is the industry fund sector’s ties to the union movement (union officials or other union-nominated trustees sit alongside employer representatives on super fund boards, often forgoing their remuneration which flows into union coffers).
Throughout the Howard years, little was done to combat the worst excesses of the banks or the remuneration systems that corrupted financial advice.
‘Rice and lentils’ all you can afford with mega mortgages
When it comes to lending, for many years the problems have also been plain to see.
Crazy mortgages. Credit cards handed out to people who could not afford them. Banks happily handing out loans so big the repayments left families living just above the poverty line. Mortgages for disability pensioners. All known. All documented. All ignored.
Yet APRA — until recently — did little to stop the lax lending. Its brief was to stop the banks going broke, not to stop them forcing people into financial hardship and debt penury.
ASIC, again until recently, refused to accept that irresponsible lending could be systemic.
When Australia survived the global financial crisis without a recession, politicians claimed it was due to our strong banks and strong regulation.
This thesis was undermined when secret modelling from 2007 by APRA’s own research division became public.
It concluded that lax lending standards left the banks exposed to the possibility of unprecedented levels of home loan arrears with the potential to cause a banking crisis and recession.
The global financial crisis averted the immediate threat, as a cycle of rising interest rates dramatically reversed and borrowers’ repayments fell, but APRA appeared oblivious to the warning.
Household debt doubled as the regulator let the lending frenzy continue.
Mr Hayne has been scathing of the regulators.
ASIC “rarely went to court to seek public denunciation and punishment for misconduct”, he has observed, and APRA “never went to court”.
When misconduct was revealed, “much more often than not little happened beyond apology … a drawn out mediation program and protracted negotiation with ASIC of a media release”.
Cosy relationship between the watchdogs and the watched
The cordial, and at times cosy, relationship between the watchdogs and the watched has been on display at functions hosted by the corporate regulator.
Macquarie Bank has been the subject of repeated court-enforceable undertakings for serious breaches of conduct, including major failings in financial advice from its equities division and, at the royal commission, its long-time chief executive Nicholas Moore praised ASIC for its willingness to work with the bank to remedy breaches rather than litigate.
In late 2017, Mr Moore was a guest at the farewell function for outgoing ASIC chairman Greg Medcraft — which featured fine wine and exquisite canapes at the five-star Westin Hotel at 1 Martin Place, an address that has also long housed Macquarie.
Could anyone imagine the Registered Organisations Commission — tasked with holding unions to the same standards of governance as corporations — hobnobbing over cocktails with senior union officials? The Australian Building and Construction Commission quaffing red with the CFMEU?
But it must be understood that regulation, and the culture of enforcement, is shaped by politics and ideology.
The belief that markets left to their own devices deliver optimal outcomes was the dominant view of many politicians and bureaucrats who made the legislation, decided who would run the regulators, and chose the men — and they were all men, corporate executives or directors in the main — who led the inquiries that informed policy.
“Light touch” regulation and limited consumer protection was the result.
The law put the emphasis on disclosure and assumed that, provided risks were written down in the paperwork, the consumer was informed. Caveat emptor — buyer beware. Read the fine print.
Never mind that, in the real world, hardly anyone reads the fine print, and many would struggle to comprehend the legalese.
Faced with the complexity of finance, ordinary folk too often naively trust “financial advisers” working for mainstream financial institutions to do the right thing.
Over many years investigating misconduct by banks, financial advisers and other scoundrels in the finance industry, I have at times been dismayed by the seeming reluctance of ASIC to take tough action — particularly criminal prosecution — and an air of defeatism among some of its senior staff.
But it should also be acknowledged that some of its best have fought an uphill battle against the lobbying power of the banks and the backsliding of politicians and bureaucrats.
One of ASIC’s most senior executives interrupted a meeting with me after receiving some news.
The wealth arm of one of the major banks had convinced Treasury to punch a hole in the Future of Financial Advice Reforms that you could drive a Mack truck through, he explained. He had to urgently call the Treasury department to try to rescue legislation.
Things are changing. There is a new zeitgeist, and the banks and the spivs in the financial advice game will now be reined in. For a while, at least.
But it won’t be a shock if, in coming years, the cycle turns, and the lobbying power of big finance whittles away the controls.
Stephen Long is an investigative reporter with the ABC, covering business and finance