Is Greed ever Good? Unpacking Parts of the Banking Royal Commission
In 2013, the media broke a scandal about the Commonwealth Bank of Australia (CBA) financial planning arm having corrupt practices. This led to a Senate Inquiry and by July 2014 there were loud calls for a royal commission. The next few years saw the momentum peak with the CBA again being caught by AUSTRACK (the agency for anti-money laundering and terrorism financing) with 54,000 breaches of the law by way of their intelligent ATM network. Former High Court Justice, Kenneth Hayne, was appointed by the Governor General to conduct the Royal Commission in the Misconduct of Banking, Superannuation and Financial Services Industry, (BRC) through 2018 and report by 1 February 2019.
Over 10,000 public submissions, 30 background academic papers on the various issues, 20,000 exhibits at public hearings and over 4.5 million page views of the BRC website, demonstrates a lot of public interest in this area. The four major banks plus Macquarie Bank, make up half of the top ten ASX listed companies, with a combined market capital of over $400 billion. Most superannuation funds are invested in the top 50 ASX companies and the majority of home mortgages and business loans are via the four main banks.
The Final Report contains 76 specific recommendations which cross the sectors of banking, financial advice, superannuation, insurance, the regulators and the crucial area of culture, governance and remuneration. The Federal Government released a response on 4 February (the day the BRC report was made public) called ’Restoring trust in Australia’s financial system’. The government and opposition, knowing this was an election year, agreed to all recommendations, but the devil is in the detail.
Many of the amendments relate to banking and the application of the Banking Executive Accountability Scheme, to hold executives responsible for their employees and other entities liable. The regulators have been directed to have a “why not litigate” approach rather than negotiating to settle effectively criminal matters. However, Commissioner Hayne’s had a simple wish for a simplification and clarity of the existing laws. This would impact on the remuneration policies that he believed promoted greed and ignored the customers’ and clients’ best interests.
The interim report in September 2018 expressly stated the need to follow six principles: obey the law, do not mislead, be fair, provide fit for purpose services, take reasonable care and skill, and act in others best interests.
Separate to the BRC was an ASIC Taskforce on enforcement, which recommended more deterrent powers. The BRC endorsed these new laws and thus the maximum penalties jumped from $220,000 to $1.05 million for individuals and from $1 million to $10.4 million (or 10% of revenue up to $525 million) for corporations. The biggest penalty being a gaol sentence from five years to a maximum of 15 years. These new laws commenced on 12 March, 2019. ASIC has created an Office of Enforcement to coordinate the litigation and investigations on civil penalty and criminal matters, with the Commonwealth Director of Public prosecutions. This is a step in the right direction.
The cultural requirements will take time to be processed but I hope the agricultural loan recommendations are fast tracked. It seems sensible that there is a national debt mediation scheme and that experienced agricultural bank managers should be involved in such negotiations, and that drought or other natural disasters that are declared should remove interest penalties and other distortions for farm loans. However, as always, the details have not yet been released before final judgment can be made.
This is the start of reform and the biggest move has to be in the culture of organisations, especially banks, which have taken its customers for granted and allowed remuneration to drive everything – the 1980s mantra from Gordon Gecko’s character in the Wall Street movie, has come back to haunt the 2007-2018 decade. We can do much better.