Finally someone has put it out there, history may leave Hayne dangling, indeed he may regret he failed to act as they should have …
“The body language said it all” …
The body language said it all.
On the afternoon of Monday, February 4, representatives of the banking lobby and various other interest groups were locked in a windowless room at Parliament House, perusing the three-volume report of the Hayne royal commission before its public release by the Treasurer.
According to several people in the room, some 35 minutes into the lock-up, Anna Bligh, chief executive officer of the Australian Banking Association, sat back, relaxed and looked around the space.
Bligh’s brow unfurrowed and the tension in her shoulders slipped away.
*Although she and her minions kept reading, the former Queensland Premier had seen enough to know that it was a good outcome for the banks.
“Fifteen minutes in, people were looking perplexed,” recalls someone who was in that room.
“Where were the heavy hits?”
*About the same time as Ms Bligh relaxed, a representative of the industry funds turned to a colleague and said: “He’s squibbed it.”
That phrase soon echoed around the hall.
It became the headline on the Finance Sector Union’s media release expressing “bitter disappointment” at the outcome.
Investors also seemed to take the view that Kenneth Hayne had delivered a damp squib; the following day a relief rally sent bank share prices soaring.
*In the wash-up of the royal commission, the disconnect between the evidence unearthed in the hearings and the commissioner’s mild recommendations for change remains striking.
*With a tone of moral outrage, the report catalogues, in detail, transgressions by all the major banks and finance houses such as AMP and IOOF: fees for no service; gouging money from the dead for “financial advice” and even life insurance; traducing customers’ best interests and profiting at the expense of the people these financial institutions are meant to serve.
Is self-restraint the solution to a culture of greed?
The analysis firmly ties this behaviour to an aggressive sales culture in the industry that puts the pursuit of short-term profit ahead of basic standards of honesty and decency.
*”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,” the commissioner lamented.
*”Providing a service to customers was relegated to second place. Sales became all important.”
How does the commissioner plan to dismantle that culture?
Although he has called for some tweaks to the law, self-regulation is one of the main remedies he’s relying on.
Justice Hayne wants the banks to adopt the recommendations of the Sedgwick review, a study of bank remuneration by former APS commissioner Stephen Sedgwick commissioned by the big banks’ lobby group, the Australian Banking Association.
The Sedgwick review stopped short of recommending an outright ban on incentive payments for product sales, but said pay incentives for retail bank staff should not be based directly or solely on sales performance, and that sales incentives should form a minor part of remuneration for bank employees.
*All the banks have publicly committed to implementing the Sedgwick review’s recommendations.
*But bank insiders say privately there is a lot of wriggle room; and how long before commitments are eroded under pressure to deliver shareholder returns?
*Just as instructive is what the Hayne commission didn’t recommend.
The conflicts of interest, the duping of customers, the sales pitches masquerading as financial advice were all underpinned and amplified by regulators’ decisions to let banks swallow up wealth management businesses and broking houses.
This turned banks into vertically-integrated behemoths with a vast sales force to flog financial products they manufactured and sell people investments that made the banks’ money, often regardless of whether this was in the best interests of the customer.
*Enforced structural separation of these businesses was one of the biggest fears of the finance sector and an obvious remedy.
*But it was not considered in the Hayne report.
Super conflicts sidestepped
In a similar way, the royal commission sidestepped the blatant conflicts of interest that extend all the way to the boardroom.
Under law, the “sole purpose” of the trustee of a superannuation fund is to serve the interests of members.
Yet in the retail superannuation funds run for profit by banks and finance companies, the interests of members have been routinely undermined by arrangements that place bank executives and senior employees on the trustee boards.
*What a surprise that trustees whose remuneration in their day job is tied to the profits of the bank have let underperforming super funds funnel huge revenues to the banks that own them and pay multiples of market rates for in-house bank services.
*These conflicted governance arrangements were left untouched by the royal commission.
After posing the question of what led to the scandalous behaviour, Justice Hayne concluded: “Too often, the answer seems to be greed — the pursuit of short-term profit at the expense of basic standards of honesty.”
Yet the laws governing much financial regulation were built on the assumption that “greed is good” — in the economist’s sense that the pursuit of self-interest (profit) will lead to competition and innovation that benefits consumers.
*In the superannuation sector — where not-for-profit industry and corporate funds have overall consistently outperformed bank funds run for profit — this is a highly questionable assumption.
*A different commissioner, a different inquiry, might have contemplated whether the purpose of maximising retirement savings is served at all by having profit-driven funds in the compulsory superannuation sector.
He or she might have gone where the Cooper review of superannuation baulked at going, and recommended that everyone’s superannuation be transferred into a basic account with balanced investments and low fees unless they actively opted out and chose another fund.
But it was unrealistic to expect this from a small ‘c’ conservative and black letter lawyer such as Justice Hayne.
Can bankers really change their spots?
Someone I know recently observed that in most professions — medicine, law, even economics — there is a cohort of people whose primary motivation is not to make money but to serve the public good, but you don’t find this much in finance and banking.
It’s a view reflected in popular culture: from Billions to Wall Street and advertisements that harness the trope of the greedy banker, the pursuit of profit and naked self-interest is portrayed as a hallmark of the industry.
Justice Hayne’s view was that the problem lay less with the law than with a lack of enforcement; stung by his criticisms, the corporate watchdog ASIC is now promising that litigation — rather than doing deals with banks — will be its first option.
Yet, at the same time, its new chairman James Shipton has been complaining to all who will listen that ASIC doesn’t have enough money.
If the regulators up the ante, and while the memories of the commission linger, there are sure to be less bankers behaving badly.
Whether it lasts is less certain.
*Like the bread and circuses served up in the arenas of Rome, it may be the royal commission’s main purpose was to distract and entertain.
*The hearings were great theatre — daily revelations of egregious conduct absorbed the populous and the shaming of bank executives and directors helped sate the public’s anger.
There’s even a couple of heads on sticks now NAB’s chiefs have resigned, and the politicians are promising action, though few people will examine the detail.
But will it slowly return to business as usual as we look away?