October 20th 2018

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Articles from this issue:

COVER STORY Internal strife at Fortress ABC by Peter Westmore

EDITORIAL The state is separating children from families

CANBERRA OBSERVED Liberals are bare favourites for Wentworth

DEREGULATION Sugar growers are getting burned on churned-up playing field

EUROPE Attempt to discipline Hungary divides the EU

CHINA Social Credit System gives complete control of every citizen

EDUCATION Curriculum refinements will not fix schools

BANKING ROYAL COMMISSION Banks' failures are a symptom of social malaise

HISTORY Moby Dick and American exceptionalism

SHAKESPEARE Tick-tock: clues to the timeless appear of the Bard

INTERNATIONAL AFFAIRS Trump to UN: we'll do it our way; you do it yours

MUSIC Well-tempered scale: might put an alien in a bad temper

CINEMA Alpha: Beautiful beginnings

BOOK REVIEW Essays towards reconstruction

BOOK REVIEW Can society survive the decay of religion?


CLIMATE CHANGE Hockey 1, hockey 2: Good science contradicts IPCC's two-degree alarmism

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Banks' failures are a symptom of social malaise

by Peter Westmore

News Weekly, October 20, 2018

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, headed by one of Australia’s most prominent jurists, Ken Hayne, has released its interim report, which shows systematic abuse of financial power by the big four banks and insurance companies.

Royal commissioner Ken Hayne

The royal commission was established on December 14, 2017, following widespread complaints about the banks’ treatment of their customers, and will deliver its final report by February 1 next year.

The royal commission received over 10,000 submissions from the public about misconduct in the banking, superannuation and financial services industries. The banking industry dominated the public submissions, accounting for over 60 per cent of them.

The commission engaged with over 60 financial institutions, including retail and investment banks, home and car lenders, financial planners and advisers, and the insurance and superannuation industries.

The overwhelming number of complaints concerned a handful of the largest financial institutions, including the “big four” banks – CBA, NAB, Westpac and ANZ – and superannuation companies such as AMP.

Independent banks and industry superannuation companies were less a focus of the commission’s concerns, reflecting that their practices are clearly better at protecting the interests of their customers.

‘Greed’ is ... a vice

The headline issue in the Interim Report was the “greed” of some large financial institutions: “The pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?”

Less reported was why and how a culture of greed had become established in these institutions. Yet the Interim Report discussed this in detail.

There were three principal reasons why this occurred: salaries, deregulation of the financial system, and the failure of the financial regulators.

First, salaries in the banks were linked to business generated and profits, encouraging a culture of reckless conduct by bank executives.

The Interim Report said: “The conduct that is at the heart of the commission’s work is inextricably connected with remuneration practices, with deficiencies in governance and risk management and with the culture of the entities concerned.

“Remuneration policies were tailored to different parts of the staff or work of each of the major banks but substantially they were the same for almost every employee at almost every level of the organisation.

“At least until very recently, the central tenet of the remuneration policies of not only the four largest banks but other banks as well (apart from the mutuals) has been to reward what the organisation treats as important: sales and profit. If there were exceptions to this approach, they were immaterial.

“The conduct identified and criticised in this report was driven by the pursuit of profit – the entity’s revenue and profit and the individual actor’s profit. Employees of banks learned to treat sales, or revenue and profit, as the measure of their success.”

Second, the deregulation of the financial system going back 30 years encouraged both “self-regulation” in the financial service industry, and vertical integration of financial services. Typically, the large banks were also offering services such as financial planning and superannuation.

Although the report looked only at events over the past 10 years, since the global financial crisis (GFC), the roots of the crisis extend back further.

As the report notes: “The traditional business of banking comprised lending, deposit-taking and the provision of transaction services … For reasons discussed below, the reach of this sector was limited until regulatory and financial conditions changed.

“In the 1970s, Australia began to deregulate its financial markets. Restrictions on bank interest rates and liability structures were removed; foreign banking was made easier to access; the Australian dollar was floated. The financial sector expanded. At the same time, growth in the size and liquidity of securities markets allowed more diverse financial products to develop.”

Banks acquired financial planning, investment, insurance and superannuation subsidiaries, all of which were staffed by people who were paid by results. The results were predictable: the interests of the staff and the corporation were often placed ahead of and against the interests of their customers.

And finally, the regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), actively encouraged self-regulation, rarely prosecuting illegal or unconscionable conduct, and often failing in their duty to protect consumers and the banks’ customers when called upon to do so.

With the current downturn in the property market threatening the financial future of hundreds of thousands of Australians, the question is whether the banks will be able to transfer the cost again to their customers.

The commission’s final report will outline the measures to deal with the deficiencies in the financial system. But for many, it will be too late.

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