So what’s new? Twenty years ago, Westpac’s then boss, Bob Joss proclaimed: ‘Banks face shutting down entire divisions of business activity in order to survive…. Banks can no longer be all things to all people.’ That’s just what Royal Commissioner Kenneth Hayne is now considering after last week’s revelations of bank financial planning misbehaviour (which is quite separate from the AMP’s allegedly criminal misdeeds). Twenty years after Bob Joss’s view that banks should concentrate on their specialised banking operations, they are now reaping the ‘rewards’ of going in the opposite direction and taking over these ‘riskier’ non-banking areas. Joss had wanted the banks to limit their relationship only to becoming distribution facilitators for external fund managers. ‘From the customer’s perspective, intermediation in the savings business seems to be handled more efficiently by managed funds than by banks,’ he said, while warning of the increased level of risk in non-bank savings products. Instead, Joss’s successors acquired not only this riskier business, but also the ‘riskier ethos’ and reward-for-performance culture of the financial planning industry. And even after the RC’s revelations, Westpac’s CEO Brian Hartzer still sees banks who really want to do the right thing by customers having a role in providing ‘sustainable’ financial planning that is ‘good advice, free of conflict of interest and cost effective for the provider’.
Hayne’s enquiry looks like being the catalyst that undoes this. Hayne wants to know from the banks whether vertical integration ‘can serve the best interests of clients’; banks are now required in their submissions to the RC, as the Australian reported, ‘to justify the entangled cross-ownership of businesses and address issues such as conflicted remuneration for financial advisers, the shunting of customers into in-house products and the breakdowns in compliance between parent companies and rogue financial subsidiaries’. In Joss’s day, banks were seen as ‘safe-as-a-bank’; if the integrity of the banking system has been irretrievably damaged by the daily revelations of disgraceful behaviour not within the banks’ core business of banking, but from their financial advisory and other offshoots, there will be seriously disruptive economic consequences. Those who opposed the creation of this RC quite properly feared such an outcome; the stability of our banking system being put at risk on non-banking issues. The ultimate cost/benefit outcome is yet to justify the host of politically expedient ‘mea culpas’ from ministers who resisted setting up a populist political solution to the reality of a combination of a failure both of business ethics and governmental regulation.
The Banking Royal Commission has so far focussed almost entirely on financial advisory scandals, particularly the AMP, rather than on core banking itself. True, there have been accusations of inappropriate home loans but that is directly an issue for governmental prudential regulators – if they are doing their job, particularly in relation to mortgage brokers. And the same goes for most of the ‘horror stories’ about financial advisory services. Asic’s appalling failures, as displayed before the RC, to regulate or act on complaints (admitting to only one criminal prosecution in the past 10 years) has prompted the government into action. Late in April it got around to implementing last December’s Taskforce recommendation of major increases in penalties for both criminal and civil offences, of expanded powers to ban ‘unfit, improper or incompetent’ individuals and refuse, revoke or cancel financial services licences. This reform had been on the way ever since former Asic boss Greg Medcraft complained four years ago that ‘Australia is a paradise for white collar criminals…Penalties, particularly civil ones, are not strong enough… A slap on the wrist is not deterring people’. By publicly undertaking to appraise ‘external measures such as enforcing compliance’, Hayne may have hurried the government along, rather than being the initiator, in strengthening the Asic watchdog with some real teeth. Its years of ineffective barking had given those seeking financial advice a false sense of security on top of that provided by ‘reliable names’ like the banks and AMP. Let’s see if the new top dogs at Asic can actually bite – and if the banks can rediscover their integrity.
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