Business

A proper banking and insurance inquiry please

The game is up for New Zealand's big six Australian-owned banks and insurers. More once-over-lightly reports from captured regulators and friendly politicians won't regain the trust of consumers. A full independent inquiry or commission into their conduct is required, writes Bernard Hickey.

The genie is out of the bottle now and no amount of reassurance and bus ticket wafting by banks, insurers, regulators and politicians will jam it back in. The two Reserve Bank inquiries and the Government's optimally-timed announcement on Monday of plans for a deposit insurance scheme are the latest attempts. Sadly, it's too little and too late.

The revelations last week that the CEO of New Zealand's largest bank, ANZ's David Hisco, 'mischaracterised' his personal expenses for eight years and used the wrong capital model for four years without any knowledge of his New Zealand board has blown the lid off the pretence that New Zealand is different and better than Australia.

ANZ's decision to sell a house to Hisco's wife, Deborah Walsh, for nearly $3 million less than it was worth capped off a week that began with Hisco's resignation over wrongly claiming for chauffeur and wine storage expenses.

So many times, we've been told that we should 'move along now' because there was not much to see here under the covers of the New Zealand branches of the big six Australian banks and insurers operating here: CBA's ASB, NAB's BNZ, Westpac, ANZ, IAG (NZI, State, AMI and Lumley) and Suncorp (Vero and AA Insurance).

Somehow, despite the evidence extracted in public by Australia's Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, we were asked to believe that, unlike their Aussie parents, these firms were not abusing their dominant market positions and banking and insurance licenses here. Somehow, we were told, the New Zealanders in these Australian firms and their New Zealand regulators had kept those very naughty Australian shareholders and group executives in check.

The implication was those Australian banking and insurance executives were culturally more likely to be corrupt, venal and aggressively selfish than more bashful and honest New Zealanders.

'We don't bowl underarm,' was the shorthand response when ever more egregious abuses were uncovered in Australia and grumblers pointed to similarly high profits in New Zealand.

'Not much to see here'

Back in April last year before the worst of the Hayne Royal Commission reports emerged, Reserve Bank Governor Adrian Orr even said there was no need for a similar bankinq inquiry here because we were better than them.

"The true problem and challenge that is going on in Australia is cultural. It’s not whether the regulator was awake or asleep. It’s cultural," Orr told TVNZ's Corin Dann on Q+A.

Asked if the culture of New Zealand banks was the same as Australia, Orr said: "I think it is infinitely better than some of the activity you've seen in Australia".

Orr said then that the Financial Markets Authority was watching investor and issuer behaviour, the Reserve Bank was watching bank safety, the Ministry for Business, Innovation and Employment was watching consumer protection. Therefore there was no need for a Royal Commission, he said.

"Why, suddenly, stop everything and have a Royal Commission in search of a problem not yet to be identified? It just doesn't make sense."

But that confidence about New Zealand's exceptionalism sagged within days as more revelations of wrongdoing in Australia arrived and politicians in the Government started expressing concern about the lack of an investigation.

So the Reserve Bank and the FMA launched an inquiry of their own (of sorts) within a couple of weeks in May. It reported back in November last year it had found bad behaviour. They called for better behaviour or else, they said, there would be tougher legislation. FMA CEO Rob Everett and Orr wagged their fingers at the banks and suggested they be given powers to regulate their behaviour. But they didn't name names. There were no fines.

No names were named

This was despite the fact that it was clear when reading between the lines that names could have been named and plenty of bad conduct was there.

"Our review identified more than 50 remediation activities that were in progress or recently completed," they wrote, pointing out 431,000 customers had been 'impacted' to the tune of $23.9 million. That means banks over-charged customers by that much.

The tone of the report showed why the FMA and the Reserve Bank were the wrong people to do it. Their core task is to protect public confidence in the financial system.

Naming names and undermining confidence in one of the too-big-to-fail banks would have meant the regulators were actually breaking the law.

"These (remediation) issues, while occurring across most banks, appear to have a relatively low average financial impact per customer. This could change as banks continue to work through the assessment and remediation of issues," the report said.

"We also identified a small number of issues related to poor conduct of bank staff rather than systems or processes. While fewer customers were affected by these issues, the financial impacts to customers and the banks are potentially larger. Based on the information disclosed by banks, these instances of poor conduct were not widespread."

That's alright then. But still no identification of who they were and what has happened. I called for a Royal Commission then too.

This is not new

The Reserve Bank has a history of not identifying wrongdoers and its performance when reviewing CDL Insurance showed how it favoured broad financial stability over customer and shareholder interests. It did not disclose the problems it knew about until forced to.

It has even done the same with ANZ in recent weeks. It was told of the real reason for Hisco's 'health issues' and his 'mischaracterisation' of expenses weeks before the the public, but disclosed nothing. The Reserve Bank's natural instinct is always to protect the reputation of the financial sector, and to maintain confidence in the stability of the system. That is embedded in its act. It is an inherent conflict of interest.

How can you be tasked with rooting out wrongdoing in your sector when also being tasked with maintaining confidence?

Monday's announcement by the Reserve Bank and ANZ that two inquiries had been launched and they would choose an 'independent' inquirier simply extends the attempts to put the genie back in the bottle.

The genie is out

And it's not just banking.

Monday's survey by Consumer NZ showing consumers didn't trust insurers any more should also be sobering reading for the FMA and the Reserve Bank, both of whom regulate the sector.

They also conducted their own review that reported, as with with the banks, that there was wrongdoing, but we should trust the regulators to solve it behind closed doors without anyone being named or shamed. Here's my piece from January on that report. Consumer NZ found just 13 percent of respondents trusted insurers.

Not surprisingly, the FMA and Reserve had reassured us much earlier that there was not much to see here and they had it under control.

Prime Minister Jacinda Ardern rejected calls today for a Royal Commission, arguing that the Government did not want to waste two years waiting for a Royal Commission report when it already knew the problems and could solve them now. These are exactly the arguments used by Bill English to reject calls for a Mental Health Inquiry in 2017 and Australian Prime Ministers in 2015 and 2016 to reject calls for an Australian Royal Commission into banks and insurers.

But the problem is no one knows the extent of the problems because no one has been named and shamed and fired. Hisco's effective firing last week lifted the lid on what is underneath, with detail and names and numbers and places.

It's elementary, Watson

Now the bank is going into its bunker, in part to protect its current CEO Antonia Watson, who was a director of the ANZ entity that sold the St Heliers property cheaply to Walsh. She, along with John Key, are implicated in the governance failure at the heart and the head of ANZ.

"We have made all disclosures over David's employment arrangements that we are legally obliged to," a spokesman for the bank told NZ Herald when asked for more detail about Hisco's expenses..

"This remains an employment matter, and while we've been open about the circumstances of David's departure from ANZ, it isn't appropriate to discuss his personal employment arrangements in any further detail."

ANZ announced in May that Hisco was leaving for health reasons. At the same time it told the Reserve Bank the real reasons. The Reserve Bank told no one then. And neither did the ANZ.

What else aren't the ANZ, the Reserve Bank, the other banks, the insurers and the FMA not telling us?

That's where a Royal Commission should come in and break through the carapace of captured regulators and their captors.