Aussie Royal Commission says bad conduct driven by pursuit of short-term profit at expense of basic standards of honesty. Bank shares rise despite 'day of shame'

Michael Douglas as Gordon Gekko in the 1980s film Wall Street who said "greed is good."

The highly anticipated interim report from Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry criticised the industry for a culture of greed, but didn't recommend any penalties, which saw bank shares rally.

Commissioner Kenneth Hayne's report said the reason for bad conduct often appears to be greed through the pursuit of short term profit at the expense of basic standards of honesty. On top of this regulators rarely took the big banks to court, and infringement notices imposed immaterial penalties.

The Australian Bankers' Association said the release of the report marked a day of shame for Australia’s banks.

"There are no excuses for the behaviour that has been exposed by the Royal Commission. Banks accept responsibility for their failures and right now they are working day and night to make things right for their customers," ABA CEO Anna Bligh said.

Treasurer Josh Frydenberg said the interim report and the Royal Commission's hearings show some financial institutions have fallen far short of treating Australians honestly and fairly.

"There is clearly more work to be done and the Government looks forward to receiving the Royal Commission's final report, which is due by 1 February 2019, and acting on its recommendations," Frydenberg said.

The Australian Securities and Investments Commission said it will continue to assist the Royal Commission and to work with the Government, the Parliament and other regulators to build a stronger legislative, enforcement and regulatory framework with tougher penalties. 

The Bloomberg chart below shows how shares in Australia's major financial services providers rose after the report's release failed to recommend penalties.

Below is the report's executive summary in full.

The Commission’s work, so far, has shown conduct by financial services entities that has brought public attention and condemnation. Some conduct was already known to regulators and the public generally; some was not.

Why did it happen? What can be done to avoid it happening again? These are now the key questions.

In this Interim Report these questions – ‘why’ and ‘what now’ – are asked with particular reference to banks, loan intermediaries and financial advice, with a view to provoking informed debate about both questions.

Why did it happen?

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? But it is necessary then to go behind the particular events and ask how and why they came about.

Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.

When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court. Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct. Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.

What can be done to prevent the conduct happening again?

As the Commission’s work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements. These include announcements about new programs for refunds to and remediation for consumers affected by the entity’s conduct, about the abandonment of products or practices, about the sale of whole divisions of the business, about new and more intense regulatory focus on particular activities, and even about the institution of enforcement proceedings of a kind seldom previously brought. There have been changes in industry structure and industry remuneration.

The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’. Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

Should the existing law be administered or enforced differently? Is different enforcement what is needed to have entities apply basic standards of fairness and honesty: by obeying the law; not misleading or deceiving; acting fairly; providing services that are fit for purpose; delivering services with reasonable care and skill; and, when acting for another, acting in the best interests of that other? The basic ideas are very simple. Should the law be simplified to reflect those ideas better?

This Interim Report seeks to identify, and gather together in Chapter 10, the questions that have come out of the Commission’s work so far. There will be a further round of public hearings to consider these and other questions that must be dealt with in the Commission’s Final Report.   

The three volumes to the interim report can be found here.

And here's a statement from the Australian Bankers' Association;

Today’s release of the interim report of the Royal Commission into Financial Services, Insurance and Superannuation, marks a day of shame for Australia’s banks.

There are no excuses for the behaviour that has been exposed by the Royal Commission.

Banks accept responsibility for their failures and right now they are working day and night to make things right for their customers.

We will fix these problems and make them right without delay, to earn back the trust of the Australian public.

We will build a banking industry which acts with integrity and is once again respected by our customers and the Australian community. 

The industry will respond to the specific findings in the Interim Report through a submission in the coming weeks. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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18 Comments

No wonder bank shares have gone up. It's a weak interim report

"Why did it happen? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty."
No s#!t Sherlock, amazing findings

"What can be done to prevent the conduct happening again?"
That question only leads to more questions, no answers at all.
Here's an amazing suggestion, bad behaviour stops when it's not worthwhile doing anymore, i.e. FINE THE BANKS HEAVILY, you know like we get a fine for parking illegally or doing other illegal things we shouldn't do

One word:

ICELAND.

Two words...Bud Fox.

That's not the 'One word' Nzdan

Australian bankster WANKERS! is a far better description..

(apologies for the language, that's the closest I've been to a swear word on interest.co.nz in 5 months and it's just been building up, had to get it out)

It’s a country of convicts anyway, the banks are just showing their heritage.

But who do you think will end up paying the fines - bank shareholders or bank customers?

In the case where a bail in occured, people would be livid. Not sure the govt could stomach that kind of heat. Most NZers tend to forget that the profile of the bailed out SCF investors was relatively well-off South Island folk. Compare that the Hanover and Blue Chip punters, who were more likely to be your run-of-the-mill city dwellers. The stench on that was high.

Little question because I don't know the answer and would be keen to understand if anyone does know? The legal entities around the establishment of the Aussie banks and the framework that is in place for New Zealand subsidiaries, are they completely separate or could one be pressured to assist the other in the event of a crisis. I only ask because Westpac's 50% of Australaian loans being interest only is a concern. If Westpac for example were to face an issue in Aussie and required a bail-out there, would that bail-out be an exclusively Australian govt issue, or would we share the burden? It was easy to look at RBS, Northern Rock and HBOS, they were all domiciled in the UK, albeit in RBS and HBOS's case with huge overseas exposures, but the burden essentially fell on the UK taxpayer... Are the subsidiary's in NZ completely separate legal entities or would they go down with the mothership? It would work both ways, if a NZ lender were to have a crisis, in NZ ANZ has the largest 'late in the cycle' loanbook, would the Aussie government share a bail-in/out with the NZ government if that were to occur.

If anyone has an understanding of how the legal framework is set up, please share, because as J.C points out above, these are a little bigger than the finance companies of yesteryear.

Sorry I should also have added the reason I asked the question.

If one side of the Tasman can effect both sides of the Tasman for 'proportional government assistance) then the effects could be disproportionate because the Aussies have a government backed depositor guarantee for savers (albeit their savings rate is pretty abysmal) while the NZ banks have the OBR which would clip bank depositors first for a bail in (and despite our savings rates being below 'pretty' abysmal Australia's). We do have a lot of previously prudent savers who are invested in the Aussie banks but wouldn't have the same level of security as savers in Australia in the event of John Key's OBR being enacted.

Found the OECD savings rate graph this evening which is also worth a look at when you see where AU and NZ are placed. Worth a play, it's quite interesting.

https://data.oecd.org/hha/household-savings.htm

Hi Nic. I don’t have all the answers but I can clarify a miss conception about AU deposit guarantees. When I was in AU there was a bill in parliament that was specifically for and stated that deposits would be guaranteed up to a certain amount. It was voted down leaving the door wide open for a bail in. The CEC report on YouTube covered this in depth if your interested.

Yes, i remember Martin North talking about the deposit gaurantee needing to be "activated", and also mentioning some legislation that sounded a bit vague that could possibly be interpreted as an opening for a bail-in of Ozzie banks.

Bail in law appears to be : Financial Sector Legislation Amendment (Crisis Resolution Powers And Other Measures) Bill 2017

Hi Yvil
Agreed the report doesn't match up with headlines of the past year: e.g. "AMP CEO resigns amid deepening banking scandal". The rise in bank shares supports this and suggests a common consensuses of a sigh of relief.

On the face it, the executive summary having no mention of compensation or penalty, it would seem to be the old slap with a wet bus ticket. ANZ (Australia) charging $3800 in fees to save a customer $285 would seem a good case for compensation (refer https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=120...) .

I look to reading the full interim report over the weekend as I assume that there must be more in the detail.

Clearly there was not good conduct on the part of the banks, but their regulators must have been also been either accepting of that culture or asleep.

I am growing a little uneasy about the rigour of the New Zealand FMA / RBNZ inquiry. Public hearings seem to have been a key part of the Australian Comminsion's investigations, but this is sadly lacking in the New Zealand situation.

As an example; individuals recourse in New Zealand is through the banks-funded Banking Ombudsman. Given its source of funding; is it tainted by the Australian banks' culture of acceptance of greed as reported by the Commission? The experience of those who have had dealings - successfully or otherwise - with the Banking Ombudsman would seem one area worthy of public consultation.

Banking is based of a high level of trust; when banks have been self-centered and greedy and there has been a "scandal", then that trust is lost.

Giving banks fines only punishes shareholders who may not be aware of the crimes perpetrated by bank management. They are not enough, in addition, accounting control fraud by bank officers should be punished as severely as any other fraud.

I thought ignorance wasn't a defense? Shareholders happy for dividends, just don't tell them how you delivered though..

"You naughty boys! Dont' do it again!"

"Ok, we won't"

"Promise?"

"Yessss"

"Ok, go out and play then."

And over here? It’s like the police asking a ring of burglars to come and fess up to a whole lot of burglaries that they (the police) don’t even know about. But the carrot is, of course ,you can do it because you will all walk free!

Nic Johnson.... Post your question to Martin North at Digital Finance Analytics via his YouTube channel "walk the world". He has uploaded a video overnight regarding yesterdays Royal Commission Interim Report so I would start there.
Here's the link to that video just in case you haven't seen it.

https://www.youtube.com/watch?v=okJcnfndlxQ