This was published 6 years ago
Opinion
Banks squander their political credit
By Jack Waterford
Whether the Turnbull government is in a death spiral and is simply unable to adapt to opportunities may well be settled over the week ahead. Malcolm Turnbull and Scott Morrison have been presented with an opportunity John Howard would never have passed up. Government has just been permissioned, by popular acclaim, to turn 180 degrees against the banks and seize a populist political agenda, probably in the process helping the budget bottom line by an extra “fine” on bank superprofits.
This would represent extraordinary political cheek, given the slavish adherence by the government to banking interests since the election of the Abbott government and its obdurate and truculent opposition to any sort of inquiry into bank misbehavior, at least until the government temporarily lost its majority in the lower house of parliament. And, some might say, by the initial insistence of senior ministers, from the prime minister down, that any “historical” problems of misbehavior had been addressed, that there was now a determined and re-equipped super policeman in ASIC to deal with any future misconduct, and that, anyway, any scandal the Hayne Royal Commission would rake up would merely rehearse problems already well known to government, and already dealt with.
It became impossible to maintain these sorts of lines this week. The royal commission began disinterring evidence of willful and conscious charging of fees for financial management advice which had not been offered or available – in some cases to clients who were dead, and systemic failures, which ought to have been obvious at board level, to deal with a pattern of effective fraud by banking staff.
All on top of treating ASIC with the contempt its famed “light hand” deserved. Its unwillingness to be intrusive or tough in its supervision, its seeming incapacity to know it was being lied to, and its willing reception of paid-for-advocacy as supposedly independent advice has discredited that agency’s management as much as the banks. It became clear that government had to admit there was a big problem, in spite of its early denials. It had to threaten to be tough, including with jail sentences if necessary. Morrison has already begun practising his pirouettes, but it would be idle to think that he plans to limit himself to threats, or promises of stronger legislation in the future. The banks now officially are bastards, and nothing is too bad for them.
Even a crisis at one major bank can be damaging to general confidence in the banking system. Credit: Ian Waldie
Were John Howard in charge, he would explain his change of tack first by saying that it had become clear that banks had broken a fundamental contract of decency and integrity to its clients, to government, and to the public at large. They had gone beyond a culture of sometimes seeming to put their own interests first – lamentable, but understandable in a capitalist system – to open deceit, bad citizenship and breach of a host of duties, including quasi-fiduciary ones that ought to exist as between banker and client. He would also give a Peter Beattie-type apology: saying he had initially been quite sceptical about persistent complaints and reports of a culture of rorting within the banks, because he knew many bankers and regarded most of them as decent and honourable chaps. He had heard the accusations and felt, sometimes, for those who saw themselves as victims, but he had thought that the problems were not systemic or cultural ones, but the product of a few bad apples, already being addressed by the law and the regulatory system. It was now clear first that the problems were bigger than that, and that public outrage had reached the point where government had to act and be seen to act. Having said all that, Howard would feel himself liberated from any previous policy position or promise, and do whatever crude necessity and an instinct for political survival might suggest. The Liberal Party might stand for sound money and a strong banking system, but was not a protection system for rorters, he would say.
National Party types, and even the odd (mostly rural) Liberal populists would sigh and say that they had known this all along, but that they were at the least glad the government had finally seen the light, albeit only after direct pressure from dissident back benchers. Even a few Liberals with close links to the top end of town would disown any alliance with, or particular obligation to the banks, suggesting they had betrayed the government’s trust and were on their own. They might calculate, after all, that the financial establishment, of all of the top end of town types, would still have to contribute generously (as it has done these past six years) to the Liberal Party, for fear of finding something worse.
Officially, Turnbull resisted a royal commission because he believed that nothing much bad would be found, and that it would be an expensive but fruitless witch-hunt, with only political and economic downsides.
The banks now officially are bastards, and nothing is too bad for them.
The truth is that government knew all along that any competent inquiry – and the Hayne Commission certainly seems to be that – would find terrible cases of misbehavior, some of which would appear to be cultural and systemic. They had little confidence that banks would be able to brazen it out, even with squadrons of senior counsel attempting to resist the production of evidence. They had, after all, observed the frequency of existing scandals and the ineptness with which senior bankers had defended themselves. Nor, within the senior councils of government, including the bureaucracy, was the argument really about protecting its mates and political benefactors.
The internal argument was that a series of scandals involving the banks would shake confidence in the Australian banking system, and not only out in the Australian electorate. It would do so in markets of the world.
Major Australian banks had survived the global financial crisis of about a decade ago well, in part because they were big by world standards and not overcommitted in the major markets where the biggest problems were; but also because the various regulatory authorities, such as the prudential regulatory authority, ASIC, and even the competition commission, had been keeping a fairly tight rein on capitalisation, lending patterns and exposure to risk.
Even a crisis at one major bank can be damaging to general confidence in the banking system. But a general crisis of confidence in the competence, honesty and integrity of the stewardship of banks generally would do a lot more than hurt shareholders (who were mostly, of course, ordinary Australian citizens). It could affect the price of the dollar, the interest Australia, Australian companies and Australian citizens had to pay on loans, and the net capacity to assemble funds for investment, public and private. If it caused any sort of liquidity crisis, it could quickly affect the job market, and general business confidence. Government and politicians might be agnostic, in general principle, about the affairs of a particular board, a particular management, or a particular bank. But they could never be relaxed about any sort of development that could affect general confidence in the system of which that bank was a player.
On top of that, some in the councils of government argued (and argue still), it seemed obvious that the key problem areas had not been in central banking operations per se, but in additional areas into which banks had shifted over recent decades. These were in areas such as in insurance, in the provision of financial advice, in the management of money for clients, and in the sharing of profits with third-party brokers who introduced new borrowers, often people with whom banks would have preferred not to deal directly. These, it had turned out, had provided rich pickings, both for the banks but also for those involved in selling products, in providing advice. It had emerged that these created inherent conflicts of interest, and not only between the banks and the customers of these “products”, but sometimes between the bank employees and the bank itself, particularly in reputational terms, not least when the remuneration of employees was closely related to turnovers, or to profits generated (if for the bank rather than the client).
It was quite plain that the banks' venture into such areas had seriously corrupted the banks, had done enormous damage to their reputations in the community, and had exposed the bank to liability for clients for breach of trust, poor advice, failures to disclose conflicts and so on. It was not, apparently, so plain (at least to government) that problems were systematic, with senior management and boards involved. Nor that regulatory systems were out at lunch, both because the banks lied to the agencies (apparently with impunity) and because tame leaders of tame agencies had no real taste for heavy enforcement, or the use of the criminal law. Like the banking “chaps” in Yes Minister 40 years ago, they preferred to assume the general honesty, integrity and common sense of the players, and the use of civil penalties and settlements if it appeared anyone was going slightly off the reservation.
It was all too smug and comfortable. But also all too predictable. The prevalence of white collar crime has long been known to involve an equation between the risk of being caught and the consequences of being caught. With agencies seriously understaffed for serious enforcement, and in any event uninclined to make serious use of their powers, and with the boards and senior managers of the banks sometimes themselves so seduced by the profits that they were unconcerned either about the risk of serious reputational damage to themselves, their bank, or the banking industry, developed a culture of rorting. This had become fairly obvious to everyone, including government, when holding action, designed to avoid having to have a royal commission, began. Government pretended that its tough talk, chiding words, and some restoration of enforcement resources was already doing everything that a royal commission could achieve.
In any event, it was being said, most of the banks were getting out of the financial products industry, finding the competition too stiff, the reputational risk too high, or the short-term advantages of hiving them off too attractive. Banks were, it was said, going back to core business, and in the core businesses was much less temptation, more settled rules of culture and integrity and a good deal less risk of serious conflict of interest.
Former consumer and competition commissioner Alan Fels has suggested that this trend be given a definite legislative push, but his “solution” is all too easy.
Who is to say how far the rorter culture has penetrated the core business? Look, after all, at the fundamental ways in which banking has been changing in recent times, the cowboys and girls recruited into the industry during the bad times, and the developed culture of denial, delay and lying. Look at the pretence, if “public relations problems” could not be hosed down, that problems were confined to a few bad apples.
It appears that these were not attitudes and approaches common only to divisions in the financial products areas. They seemed to prevail from the top, involving some boards and top management. And with, it now appears, the witting connivance of at least some law firms to give an aura of probity, supervision and compliance with both the letter and the spirit of the law.
It is to be hoped that the commissioner’s investigations extend into the modern regulation culture, and not only in the regulatory agencies, but also within more central agencies of government, including the ministry.
Ministers determined to chase down every suspected welfare cheat, real or imagined, with extra added viciousness coming from public service zeal, have tended to have quite different approaches when it comes to cheating on taxes, ripping off superannuates or banking customers. The perpetrators, after all, have been mates, party donors, and darlings of the financial media. The culture of regulation has all too often been a function of the easy traffic from business into regulation, and back, and an anti-regulation culture that has, sometimes, imbued the senior public service as much as the politicians.
Concepts of protection of the public interest and consumers have tended to take second place in environments in which it has been imagined that customers are fully informed players in a free marketplace, as capable of making good choices as those making their livings from taking a commission on their decisions. The public service too has juggled with its rewards systems, with the real risk that the yen to protect the public interest takes a second place to fear of survival and determination to be responsive to political whim. In much the same manner, of course, bank shareholders have done fairly well out of the net profits from the rorting, but, they are entitled to complain, not nearly as well as the perpetrators, the senior managers and board members.
Happily, such treasonable thoughts may not dominate in the short term. We all hate the banks now, and are allowed to pretend that we don’t trust them. Parties will vie with each other to be “tough” on them. What a bonus just before a federal budget.
Jack Waterford is a former editor of The Canberra Times
jwaterfordcanberra@gmail.com