Robber banks

The banks have little to fear from the Hayne Royal Commission. This was evident by the rise in their share prices the day after the release of its report. Their pubic images have taken a battering. Senior management, all scrambling to hold onto their jobs and six or seven figure salary packages, are promising a change of “culture”.

If history is anything to go by, it sounds more like business as usual. The profit-driven at-all-costs “culture” of private financial institutions is their purpose in life. The truth of the matter is that the big banks and insurance companies are guilty of outright theft, fraud, fees-for-no service, charging the dead for life insurance, unfair contracts, misleading conduct, conflicted interests and all manner of deception.

They have robbed people of hundreds of millions, if not billions of dollars. And will they go to jail? Again, if history is anything to go by, possibly the heads of a few less senior staff might roll, although Commissioner Kenneth Hayne was adamant that responsibility starts at the top.

Imagine if someone robbed a bank of even $100,000 or as much as just $1 million. How many decades would they spend locked up!

Customers and their families have had their lives destroyed with the loss of their homes, farms and small businesses, through no fault of their own, as these giant financial monopolies wielded their power.

The robber banks and insurance companies have repaid some of the stolen money, but by no means have all their victims received compensation, let alone adequate recompense.

Flood of complaints

The Commission received more than 10,000 online complaints and thousands of phone calls and letters. In the very short time allocated to it, the Commission only scratched the surface during its public hearings and did not take advantage of the opportunity to seek an extension of time. None-the-less, the report, released on Monday, February 4, revealed a great deal that no doubt the financial institutions would rather not had come to the surface.

It focuses on the four main sectors of financial services: banking; financial advice; superannuation; insurance.

Hayne noted the Commission’s work had revealed the importance of four observations: “The connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account.”

Royal Commission a fizzer

The fact that the share prices of these financial thieves rose the day after the report’s release indicates they were relieved and satisfied with its findings. After all, they had drawn up the narrow terms of reference for the Coalition which was led by merchant banker Malcolm Turnbull.

The Financial Sector Union, which represents banking, finance, insurance and superannuation workers, said the changes were mostly “cosmetic” and would not produce systemic change.

“We are disappointed that some recommendations did not go far enough, such as improving remedies for breaches of responsible lending law and banning junk products,” Financial Rights Legal Centre chief executive, Karen Cox, said.

When it comes to heads rolling and the clean out of those responsible, a few bit the dust during the Commission’s hearings. These include four from AMP, two from IOOF and the Commonwealth Bank’s CEO after the bank admitted it charged dead clients.

NAB chair Ken Henry and its CEO Andrew Thorburn hung on as long as they could but handed in their resignations just three days after the release of the report. The NAB had been singled out in the report for their lack of contrition.

On Tuesday, the day after the report’s release, Thorburn indicated that he would remain, saying that he was “more determined than ever” to head the bank despite Hayne’s damning criticism of his conduct.

Henry still did not acknowledge the seriousness of the situation, saying he “could have performed much better in the witness box”. “I certainly could have and should have done a better job,” he said, explaining that after reviewing his evidence he was “quite upset” about his performance. “Maybe I did hop out of the bed on the wrong side.”

What will seem all the more incredible to the victims of this robber bank is that Thorburn will remain on board until the end of the month and Henry will stay on until the new CEO had been appointed, presumably having a say in their replacements! (And watch for the rise of former NSW Premier Mike Baird, an NAB $2.4 million recruit almost the moment he resigned as premier.)

Conflict of interest

Hayne demonstrated an understanding of the basic workings of capitalism and the financial system in particular. Unfortunately, the report’s recommendations fall short of what is required to address many of the issues he raises.

One source of conflicted interests lies in what are known as “vertically integrated” structures. This is where financial advice, platforms and funds management are controlled by a single entity such as a bank or insurance company.

The customer is quite likely to be unaware of these internal links in dealing with an adviser or broker and the inevitable conflict of interest that arises.

“Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion [sic] of roles extended well beyond frontline service staff. Advisers became sellers and sellers became advisers”, Hayne says.

“Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards. Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law.”

Moreover, “[the] entities and individuals acted in the ways they did because they could.”

Having noted the conflicted interests and deception, Hayne does not recommend any serious remedy despite acknowledging it “would be likely to reduce the conflicts of interest that affect the financial advice industry.”

“Enforced separation of product and advice would be a very large step to take. [!!] It would be both costly and disruptive.”

“Costly” as in less profitable? “Disruptive” to profit gauging?

For example, Hayne pointed to the focus on the pursuit of profit and personal gain involved. But there are no recommendations to address the pursuit of profit, only some weak measures and a heavy reliance on trust and enforcement of regulations and the law.

Brokers hit

Anyone reading the interim and final reports or just following the media reporting during the public hearings, cannot help but wonder how they could get away with such systemic, criminal activity.

Consumers often dealt with a financial services entity through an intermediary such as a financial adviser or broker, but in many cases, the intermediary is paid by, and may act in the interests of, the provider of the service or product or of him or herself.

At present the banks and insurance companies pay the upfront and tailing (continuing for some years on) commissions. The borrower or person taking out insurance has no idea how much is being paid and if the broker has genuinely shopped around for the best deal for the client. There is no transparency.

The banks naturally factor in the cost of commissions into loan repayments. The customers pay them, but are not necessarily even aware.

The brokers are up in arms, running full-page advertisements in the media claiming it could drive customers away. They might be right! And the big winners will be the big four banks and AMP.

They do it because they can!

It became very clear during the hearings that the financial institutions acted the way they did because they felt the worst that could happen if caught was a little remediation for affected victims. They seemed to have little to fear from the two regulators – the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

As its name suggests, APRA is responsible for prudential matters while ASIC has comprehensive responsibilities for regulation of market integrity, consumer protection and corporations law in relation to all types of businesses offering banking and deposit products, insurance products and superannuation, as well as investment products and financial advisory services.

ASIC has considerable powers of investigation and enforcement and can pursue civil and criminal offences, or where serious enough, refer them to the Commonwealth Director of Public Prosecutions.

And where was ASIC during all these scandals, a number of which had been made very public over recent years by such programs as the ABC’s Four Corners?

When asked in a public hearing of the Commission what ASIC did when it became aware of the fees-for-no service problem, the response was that it began investigations in 2015 and released a public report on the matter in 2016.

“That essentially had three elements to it. One was looking at how the affected customers could be remediated. That was a primary focus for ASIC. The second was engaging with those institutions to make sure they reviewed other parts of their businesses to see whether there were further examples of fees being charged without a service being provided. The third element was ensuring that those entities had the systems in place to avoid the risk of this sort of issue arising in the future.”

But no criminal or civil proceedings against the financial institutions that had breached the law! ASIC’s approach seemed to be on reaching agreement with the powerful financial institutions, at best a small fine that would not have been even noticed on their balance sheet.

Profits, profits, profits

“As I said in the Interim Report, many of the case studies considered in the Commission showed that the financial services entity involved had chosen to give priority to the pursuit of profit over the interests of customers and above compliance with the law,” said Hayne.

What else would anyone expect? After all – this is capitalism.

“Some have sought to explain this emphasis on the pursuit of profit as reflecting the fact that a financial services entity is ultimately accountable to its shareholders.”

“This gives rise to a further point about the nature and extent of directors’ duties. Directors must exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose. That is, it is the corporation that is the focus of their duties. And that demands consideration of more than the financial returns that will be available to shareholders in any particular period.”

“Regardless of the period of reference, the best interests of a company cannot be reduced to a binary choice. And financial services entities are no different. Pursuit of the best interests of a financial services entity is a more complicated task than choosing between the interests of shareholders and the interests of customers.”

While getting to the essence of capitalism – profits versus people’s interests – Haynes waves a magic wand under the illusion that some code of conduct will curb the insatiable appetite of the richest and most powerful, monopoly corporations.

Heart of capitalism exposed

“Addicted to boosting profits, are banks able to alter their culture?”, was one telling headline, although it should have read: “Addicted to boosting profits, banks unable to alter their culture.” (Sydney Morning Herald, 9-10/02/2019)

Lenin, in his work Imperialism, the Highest Stage of Capitalism, descried the process of monopolisation through concentration and centralisation of capital with the development and domination of finance capital to the point where the top corporations are owned or at least controlled by the monopoly banks and financial institutions i.e. finance capital.

Capitalism has undergone qualitative changes within its system, with the growth of finance capital and the expansion of its tentacles into every facet of life. It has become even more powerful, its forms of exploitation more insidious. As the saying goes “too big to fail”. The phrase “too big to touch” should be added to that.

The power of finance capital is principally derived from the vast amount of capital it has at its disposal. It can decide what investments go ahead, buy governments, and bankrupt corporations, farmers and individuals.

That is why the Coalition government initially held out against public pressure to initiate a Royal Commission into the sector (voting against it 26 times) and when forced to capitulate turned to the banks to draft the terms of reference.

Action required

The government immediately agreed to “act on” all 76 of Hayne’s recommendations, but chose its language carefully so as not to say it would carry them all out in full.

If carried out in full there are a few that could be of benefit such as to farmers. There is one, however, that has caused considerable controversy. That is the recommendation “that a borrower pay an upfront fee to a mortgage broker who secures them a loan, rather than the broker receiving an ongoing commission from the lender.”

This could result in people turning directly to lenders and bypassing brokers, unless a set commission is set and the banks must also charge it – another bonus for banks!

Financial institutions have become conglomerates with total control of the sector. It is time that banks and insurance companies hived off their various non-banking or non-insurance activities.

People’s Bank

The Communist Party has for some years pushed for the establishment of a People’s Bank and People’s Insurance Company. Such institutions would be publicly owned and democratically run with trade union and other community representatives on their board.

While they should be run on a profitable basis, returning a dividend to the government, their prime purpose would be to provide services to the public, small businesses and farmers. The profits would not end up going offshore, but remain in Australia.

Likewise, the investments they make could be put to projects of social benefit such as construction of public housing, schools, hospitals and other key infrastructure. It would remove any excuses for public-private partnerships.

Guided by a social charter and lower interest rates on loans and higher interest rates on deposits, they would provide genuine competition to the Big Four banks and AMP. People would soon recognise the benefits of transferring their savings to them.

Harsher penalties for financial institutions guilty of systemic breaches of the law, including additional conditions placed on their licence and possibly even loss of licence, should be introduced.

The Hayne report and superannuation will be covered in a future issue of the Guardian.