Systemic Greed and the “Big 4”: Australian Finance’s Faux Day of Reckoning

The raw political power of the Australian financial sector was on full display this month, with the release of the final report of the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. A commission that was hamstrung before it started by narrow terms of reference and an unrealistically short time-frame, unsurprisingly failed to take aim at individual CEO's or board members that have been instrumental in perpetuating the very systemic misconduct and predatory practices identified.

The commission came into existence through perhaps the least preferable conditions imaginable; a bank-friendly conservative government, viscerally opposed to it and desperate to avoid it, but in the end, pushed into a corner by its own backbench and tapped on the shoulder by the banking sector itself to concede its inevitability. The “big 4” banks (ANZ, NAB, Westpac and Commonwealth) seized the opportunity to get out ahead of the curve and implore the government to make this commission as toothless as possible. They recognised they were doomed to a certain level of public humiliation and regulatory retribution, but this was an exercise in damage control.

A letter was sent to then Prime Minister Turnbull signed by the chairperson and CEO's of all four major Australian banks soliciting “…a properly constituted enquiry into the financial services sector” that “must have several significant characteristics”. They demanded a commission led by a financial novice, with limited scope, stuff-all time to complete it and had the gall to expect an acknowledgement of “the broad and positive contribution that banks make to the Australian economy and to millions of customers and shareholders”. They literally demanded a reminder to everyone of just how lucky we are to be blessed with this banking oligopoly that abused its power to the point whereby a royal commission into its dodgy practices became inevitable.

And you know what? Surprise, surprise, that is exactly the commission we got. This fact alone should be enough to make one shudder at the corporatocratic nature of our system, but once you dig into the details of this commission, that furrowed brow of yours might just transmute into a shade of crimson. It was explicitly prevented from making recommendations in relation to macro-prudential regulation, policy, or oversight, which, according to the terms of reference, relate to “the structure, role and purpose of financial regulators, that is concerned with containing systemic risk, which can have widespread implications for the financial system as a whole, beyond simply the banking system”. So under no circumstances was this commission allowed to tackle issues of systemic risky behaviour, like for instance, the kind of behaviour that led to the sub-prime mortgage crisis in the US that crashed the entire economy. Great. Especially when you consider one of the key findings of the commission was that the regulators (APRA and ASIC) have historically been a couple of toothless tigers, failing to bring litigation against banks breaking the law.

The one-year timeline — roughly half the length of the royal commission established by Tony Abbott into trade unions — meant that out of 10,000 submissions, fewer than 30 victims were called to give their stories. The stories that were given a voice were heartbreaking. Like the young man with down syndrome subjected to forceful sales tactics which resulted in him purchasing a slew of insurance policies he did not need, or the banks aggressively pursuing the families of recently deceased individuals for loans held by their deceased family members. Arguably worse, the numerous stories of banks and insurance companies knowingly continuing to charge people fees long after they were dead. Oftentimes, banks charged customers fees without providing any service whatsoever.

Now some of you may be wholly unsurprised by these anecdotes, because you believe that what motivates those running these institutions and many of those merely working in the sector is sheer unadulterated greed. But for those of you that (for some reason) question the pervasiveness of greed within the corporate culture of our financial sector, I’ll let Commissioner Hayne lay it out for you. Describing one of the key questions the commission had to answer — namely why such poor conduct was so rife in the sector — his response was that “too often the answer seems to be greed — 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?”.

The sad thing is that this is not a new story, and that the fingering of greed as the root cause surprises few. We heard it all before during the 2008/09 crisis, when Goldman Sachs executives actively bet on the crash, knowing full-well the dodgy securities they were selling clients — backed by risky sub-prime mortgages and dressed up as triple-A rated debt — were pushing the system towards collapse. We’ve heard it again recently in the US with revelations that management of Wells Fargo bank systemically pressured staff for years to meet quotas for new checking accounts, credit cards and other fee-accruing products by opening them without the consent or knowledge of customers. This included in one case, talking a homeless person into opening 6 accounts with fees totalling $39/month. When the scandal broke, the bank fired over 5,000 of these same employees, but no executives.

There was a time when the financial sector was a means to an end, when the whole idea was to grease the wheels of the real economy, so that things worked more efficiently. It’s the entire conceptual justification for the existence of financial instruments, so that companies can raise funds more easily, and so that risk can be managed more effectively. Now, however, finance has become the end, the rampant greed within the sector has led people at all levels to seek ways of exploiting the complexity of the system. They either swindle the everyday people that interact at the bottom, seeking advice on investments, their mortgage or small business loans, or they find a way to rig the top, receiving multi-million dollar golden handshakes for increasing shareholder value, while passing on a ticking time-bomb to the next guy that could devastate the real economy when it inevitably explodes. And when it all comes out in the wash, nobody ever goes to prison. This is the one constant. Not one Wall Street executive was prosecuted after the Global Financial Crisis, despite ample evidence of criminality; “too big to fail” apparently also meant “too big to jail”.

In his report, Commissioner Hayne too, points the finger directly at senior banking executives. “There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management” he said. Despite this, no criminal charges were levelled at any of them, rather he recommended 24 cases of misconduct be referred to the same regulators he fingered as being hopelessly ineffectual for consideration of civil or criminal action. Excuse me if I’m a tad cynical regarding the likelihood of anyone at the top seeing the inside of a prison cell.

And if, true to form, nobody gets held to account for these heinous deeds, we simply can’t let it stand. The impotent terms of reference and laughably short time-frame of this royal commission demand a redo in and of themselves, but if there’s no prison terms handed down as a result of this, we absolutely need to force a second royal commission. The Financial Sector Union has rightly highlighted that the recommended changes were mostly “cosmetic” and would not produce systemic change, and yet, that is exactly what we need. We need recommendations on an overhaul of macro-prudential regulation, and we need accountability, and so that’s exactly what we should demand from round two. The alternative is to set yet another precedent of wrist-slaps and finger shakes as punishment for society’s most greedy, unethical and powerful individuals.