Banking royal commission: The financial sector's descent to the fourth circle of hell

Updated

Forget purgatory, Australia's financial sector is currently rooted in the fourth circle of hell — the spot reserved for those being punished for greed and indifference to the plight of others.

Australia's big banks, superannuation funds, wealth managers and insurers are now facing massive and enforced changes to their culture, management and conduct, largely thanks to their own testimony.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has forensically picked apart the appalling behaviour that has become entrenched; examining sales-driven commissions and remuneration, poor risk management, tardy customer remediation, as well as the role of regulators and the law in the disintegrating trust the community has for the sector.

It has been a humiliating time for the banks. Here's how it unfolded.

PM Malcolm Turnbull tells Labor to drop banking royal commission push

August 26, 2016

Prime Minister Malcolm Turnbull wrote to Opposition Leader Bill Shorten, calling on him to drop his calls for a royal commission into the banking sector.

Mr Turnbull said the government had a different plan — compelling executives of the big banks to front a parliamentary committee once a year to explain their decisions, particularly in relation to interest rates.

"The government does not support the establishment of a royal commission into the financial services sector," Mr Turnbull told Mr Shorten.

"A royal commission, as you know, is no more than an enquiry with the power to summon witnesses and compel the production of evidence.

"It cannot lay a charge, it cannot change a law. All it can do is inquire and report."

Coleman committee calls for a one-stop shop for customer complaints

November 23, 2016

A House of Representatives committee chaired by Liberal back-bencher David Coleman reviewed the performance of the big four banks and found "Australia's major banks have let Australians down too frequently in too many ways".

It made 10 recommendations, including setting up a banking and financial sector tribunal to replace the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal.

"A banking tribunal will be a one-stop shop that allows individuals and small businesses to gain recompense when they are wronged by a bank," Mr Coleman said.

"The current system does not provide consumers with a simple means of redress."

The new Australian Financial Complaints Authority commences operations on November 1.

ASIC investigates dodgy mortgage brokers

March 16, 2017

ASIC chair Greg Medcraft said dodgy mortgage lending practices had become so rife the corporate regulator was investigating a significant proportion of Australian banks.

Mr Medcraft said, in addition to charges against Westpac Banking Corporation for allegedly failing to adequately assess clients, a further 10 institutions were in the firing line.

"When we are talking to lenders, it usually means we think they have broken the law," he said.

Banking remuneration review demands major overhaul

April 19, 2017

A review commissioned by the Australian Bankers' Association recommended "a sharp break with the past" over remuneration practices.

The review, headed by former public service commissioner Stephen Sedgwick, made 21 recommendations, including incentives for retail bank staff to no longer be based on sales performance alone.

Mr Sedgwick said the recommendations would address a "trust deficit" in the banking industry.

"Almost every bank will need to change at least some of its practices to comply with these recommendations," Mr Sedgwick said.

"Time is not on the side of the industry. I suggest that each bank quickly implement these proposals," he said, adding the changes should be in place no later than 2020.

PM Malcolm Turnbull announces banking royal commission

November 30, 2017

PM Malcolm Turnbull capitulated on his previous dismissals of the need for a banking royal commission after sustained pressure from within his own Government and an admission by Australia's big four banks that an inquiry was necessary to restore public faith in the financial system.

"Since the financial crisis, there have been examples of misconduct by financial institutions. Some of them extremely serious. And that's demanded a response from the institutions themselves and from government," Mr Turnbull said.

"The only way we can give all Australians a greater degree of assurance is a royal commission into misconduct into the financial services industry."

Kenneth Hayne appointed to head royal commission

December 1, 2017

Former High Court judge Kenneth Hayne was appointed to head the banking royal commission with the brief to deliver a final report by February 1, 2019.

Mr Hayne had been a Justice of the High Court for more than 17 years before retiring in 2015.

Mr Turnbull, then-attorney-general George Brandis and then-treasurer Scott Morrison said Mr Hayne was the "ideal person" to conduct the public inquiry.

"He is renowned for his brilliant mind, his forensic skill, and his deep sense of justice," they said in a statement.

Productivity Commission review finds 'four pillars' policy outdated

February 7, 2018

A Productivity Commission report questioned the effectiveness of the decades-old "four pillars" banking policy, describing it as "ad hoc" and "redundant".

The report warned the policy is outdated in today's digital world and risked allowing poor management practices to emerge and continue undetected.

"We can see some very bad commercial decisions going back since we've had the four pillars policy," Productivity Commission chair Peter Harris said.

Royal commission round 1: Broker bribes

March 13, 2018

Sorry, this video has expired Video: Royal Commission in doubt ANZ upheld responsible lending laws (ABC News)

The commission opened with an examination of consumer lending and the mortgage broking sector. Immediately, the scale of misconduct appeared to be jaw-dropping.

Cash bribes stuffed into paper envelopes, a tailor who "pushed" $122 million of home loans, gamblers getting credit extensions and more.

Counsel assisting the commission Rowena Orr, QC zeroed in on the fundamental issue of juicy commissions tied to sales success, and made the point, "the larger the loan, the larger the commission paid".

Commissioner Hayne raised the question of who is a broker an agent for; the customer, the bank or the broker?

ACCC reports on mortgage prices

March 14, 2018

One day after the commission started, the competition regulator, the ACCC, dropped a damning report on the big banks' home loan deals.

The ACCC's interim report from its Residential Mortgage Inquiry found mortgages were opaque, not competitive, and 'no frills' mortgages do not necessarily mean cheap.

The big banks appeared more interested in maintaining the current positions than offering borrowers a real choice, the ACCC said..

Royal commission round 2: Gouging the dead

April 16, 2018

Sorry, this video has expired Video: Commonwealth Bank charged dead people for no services (ABC News)

Having only just crawled off the canvas after round 1, round 2 was even more brutal for the banks.

They were pummelled with irrefutable evidence of "fees-for-no-service", inappropriate financial advice and improper conduct by financial advisers.

It was a horrible fortnight for the banks and wealth managers.

As the ABC's Dan Ziffer said, it was the week the revelations changed from "dumb and awful to utterly shocking".

Even the dead weren't spared from the banks' gouging.

AMP boss becomes the commission's first high-profile casualty

April 20, 2018

Sorry, this video has expired Video: Counsel assisting recommends criminal charges for AMP over Clayton Utz report (ABC News)

AMP's chief executive officer Craig Meller suddenly quit following revelations the company lied to the corporate watchdog ASIC for almost a decade to cover its practice of charging customers fees for advice that was never delivered.

The resignation was accompanied by an unreserved apology from AMP to its customers.

"I am personally devastated by the issues which have been raised publicly this week, particularly by the impact they have had on our customers, employees, planners and shareholders," Mr Meller said.

"This is not the AMP I know and these are not the actions our customers should expect from the company.

"I do not condone them or the misleading statements made to ASIC. However, as they occurred during my tenure as CEO, I believe that stepping down as CEO is an appropriate measure to begin the work that needs to be done to restore public and regulatory trust in AMP."

Mr Meller was the first senior executive to lose a job as a result of the banking royal commission, but was quickly followed out the door by AMP chair Catherine Brenner, AMP's most senior lawyer, group general counsel Brian Salter, and three other board members.

It was a pretty grim time for the once proud wealth manager, having been told it would likely face criminal charges for allegedly misleading ASIC.

APRA's scathing report on the CBA's culture and accountability

May 1, 2018

Banking regulator APRA torched the culture of Australia's biggest bank, the CBA, after allegations that it broke anti-money laundering and counter-terrorism financing laws on almost 54,000 occasions.

APRA found CBA's culture had developed a "widespread sense of complacency" and "lack of accountability" and said the bank's "continued financial success dulled the senses of the institution".

Receiving the report, then-treasurer Scott Morrison said was a damning rap sheet and called it "required reading" for every financial institution in Australia.

Royal commission round 3: Small business, big pain

May 21, 2018

The commission switched its focus to small business with the key question: "How much diligence should banks show in extending credit to small businesses?"

While lacking the fireworks of the first two rounds, there were still harrowing tales of families ripped apart by poor and conflicted advice.

CBA settles AUSTRAC case for $700m

June 4, 2018

After months of negotiation with federal financial intelligence agency AUSTRAC, CBA agreed to pay $700 million to end the litigation over breaches of anti-money laundering and counter-terrorism financing laws.

It was the biggest fine — by a huge margin — in Australian corporate history. The reputational cost from allegations of millions of dollars flowing through to drug importers and gun dealers was harder to calculate.

Royal commission round 4: Bush-whacked

June 25, 2018

The commission headed out of town for the fortnight, first to Brisbane and then Darwin to look at the banks' dealings with struggling farmers and Indigenous communities.

In brief, the stories told showed the banks to be lacking not only compassion, but basic common sense in dealing with farmers in strife. Decisions ruined the farmers and often cost the banks more than they otherwise should.

The banks were not the only focus in hearings' investigations into the treatment of Indigenous Australians.

The predatory practices of much smaller operators, such things as high-pressure selling of unnecessary and spurious products like funeral insurance, were galling examples of the treatment of some of the nation's most vulnerable people.

As for the banks, the most polite thing you could say is they appear to lack cultural awareness and sympathy for the first Australians.

Royal commission round 5: Super bad — rorting on an industrial scale

August 6, 2018

Sorry, this video has expired Video: AMP super under fire for poor returns (ABC News)

The superannuation industry stepped into the ring for round 5 with some big names from both the retail and industry sectors required to attend.

AMP, Australian Super, Colonial First State, Host-Plus, MLC and IOOF were among a long list who attended.

The effectiveness of regulators ASIC and APRA were also scrutinised.

More awfulness was dredged up on daily basis.

NAB received a savaging for not coughing up documents in a timely manner. It would ultimately cost the bank's head of wealth, Andrew Hagger, his job.

Getting bank tellers to sell products they were unlicensed to do, charging dead people (again), paying fees-for-no-service (again), selling unnecessary insurance products (again) — you could be forgiven for thinking the rorting and gouging was systemic, cynical and just variations on themes elsewhere in the sector.

The watchdogs came out of the fortnight looking like agreeable, toothless pooches.

Royal commission round 6: Could it get uglier? Yep, haul in the insurers

September 10, 2018

The life insurers, including AMP, ClearView, CommInsure, and general insurers such as IAG, AAMI (Suncorp), Allianz and Youi dolefully trooped in to the commission and were also torn to shreds.

The one thing you could say for the insurers is they made the banks and super funds seem not too bad.

Homeless bushfire victims were still being billed for house and contents insurance, cost saving was valued ahead of compliance with the law in travel insurance, dead people charged for life insurance (a bizarre twist on an old lurk), incapacitated workers were put through the grinder and spied on to avoid paying legitimate claims. Natural disaster claims were described as "catastrophic" for customers by counsel assisting. Enough said. The rap sheet for both civil and criminal breaches of the law is expected to be long.

Royal commission interim report

September 28, 2018

Sorry, this video has expired Video: Treasurer hands down interim report from banking Royal Commission (ABC News)

The massive tome was predictably crammed full of egregious behaviour that was no less confronting for having been aired during the first six rounds of public testimony and published in numerous submissions.

However, it set out to answer two short, but far from simple questions: What was behind the culture of misconduct and what to do about it?

The first answer appeared to be greed over-powering supine regulators. The second answer was to make banks obey existing laws. Stop them being dishonest and ensure customers' interests are paramount.

If anything, the commission called for simpler, not more, laws. One would expect the watchdogs will be given new, sharper dentures and instructed to use them. But that is for the final report in February.

The banks and their lobby group said their mea culpas. Political parties claimed the credit for the commission and tore strips off each other and the banks.

Even the big investors liked it. Shares popped up on relief and the belief a raft new of laws would crush the banks' spirit. In other words, it could have been worse.

As one observer put it, "The royal commission is saying the problem is not with the law, but it has pointed to the profit motive and enforcement as problems. The profit motive won't change, so it will have to be enforcement that saves the day."

Senate Committee inquiry into consumer protection in the banking, insurance and financial sector

November 15, 2018

It's been in the pipeline for a while and to a large extent has been overtaken by the royal commission.

The 113 page report failed to gain much publicity.

Its key recommendation to extend the royal commission was ignored.

Royal commission round 7: Winds of change

November 19, 2018

Sorry, this video has expired Video: NAB chairman Ken Henry faces the royal commission (ABC News)

The final round of hearings saw the top brass from the banks and regulators hauled in for one last grilling.

Most of the bank bosses seemed contrite, although NAB chair Ken Henry was prepared to slug it out until the bitter end.

ASIC and APRA were quizzed on policy issues and emerged a bit bruised, but not bleeding

So after 68 days of hearings, 134 witnesses, 400 witness statements and 6,500 exhibits, stumps were drawn and the commission staff readied themselves for a busy summer hammering out the final report.

ACCC final report into mortgage pricing

December 11, 2018

If you were an existing mortgage holder, particularly if it was an interest-only loan, it was more glum news.

The ACCC found this subset of bank customers subsidised the big banks by more than a billion dollars over the past year when a round of "synchronised" rate rises were enforced.

Royal commission final report

February 4, 2019

The royal commission's one-year investigation into misconduct across the financial services sector was distilled down to 76 recommendations — none of which will broadly affect the way banks operate, but have significant implications for mortgage brokers and insurance sales.

The Coalition and Labor committed to accepting the recommendations, although the Government proposed a slightly watered down approach to mortgage brokers, arguing brokers are necessary to maintain competition in mortgage sales.

As for the possibility of criminal or civil charges being laid, 24 referrals were sent to regulators for further investigation. No explicit details were tabled, although Westpac appears to be the only big institution that dodged this bullet.

The remedy for ineffective regulators is to be greater oversight of their activities, however the "twin peaks" policy of ASIC and APRA policing the beat will be maintained. ASIC's role expanded to include executive remuneration, while APRA will focus on prudential regulation (stopping banks collapsing) leaving most enforcement action to ASIC.

"Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished," commissioner Kenneth Hayne wrote in the final report.

Just how much detection and denunciation was achieved in 68 sitting days with evidence from 27 victims is open to question.

Clearly, it wasn't exhaustive and there is plenty of work left for the regulators to do if justice is to be delivered to both the wronged and wrongdoers.

If there is a winner out of the saga it is likely to be the lawyers who could reasonably expect years of well paid work dealing with the regulatory and legal issues flowing out of the systemic misconduct that has been entrenched in Australia's financial system.

Topics: business-economics-and-finance, banking, royal-commissions, superannuation, consumer-finance, regulation, government-and-politics, australia

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