17 August 2015
by Evan Jones

To fix Australia's banking culture: Start sending bank CEOs to gaol: Part 1

'We will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.

~ Section 3.2 of the 2013 Code of Banking Practice

On 10 July, at a public relations affair on the Gold Coast, our beloved prime minister, Tony Abbott, fielded the question “Should Bill Shorten quit after the Royal Commission?”.
Our Tone’s response:

“Again, I'm not in the business of giving public advice to other political parties. I’m in the business of trying to ensure that our country is as well-governed as possible and we’ve got two pieces of legislation before the Parliament — the Registered Organisations Commission Bill, which will give union governance the same integrity that we’ve long had in corporate governance …”

The same integrity that we’ve long had in corporate governance? Hello? Abbott prefers not to know, or prefers to feign ignorance. He has reached the top job on the same "principles", so why bother to change his ways?

At the moment, the umpteenth Parliamentary inquiry is being held into the banking sector, this one labeled ‘The Impairment of Customer Loans’. This is because "corporate governance" is, in banking, an oxymoron.

My submission to this inquiry would be my umpteenth submission. But nothing, or very little, ever changes. Hence more inquiries. Because the banks have the political class in their collective pocket. Including our prime minister.

In late June I received an email from a South Australian small business owner. The Commonwealth Bank had unilaterally altered the loan contract, put the borrower into Recovery, and was attempting foreclosure in July.

Two days later, I received an email from another small business owner. The borrower is yet another of the hundreds of BankWest customers who the CBA has defaulted or attempting to default by brazenly devaluing the customer’s assets on an arbitrary basis. The CBA was attempting foreclosure in July. I haven’t had the courage to inquire into the outcome of these two stories.

I’ve been receiving emails like this for 15 years. Why?

On 28 April, at a ‘Banking & Wealth Summit’ (!), Reserve Bank Governor Glenn Stevens had some strong words (if opaquely expressed) to say about finance sector corruption and dysfunctionality.

And the final issue is misconduct. This has loomed larger for longer in many jurisdictions than we would have thought likely a few years ago. Investigations and prosecutions for alleged past misconduct are ongoing.
It seems our own country has not been entirely immune from some of this. Without in any way wanting to pass judgement on any particular case, root causes seem to include distorted incentives coupled with an erosion of a culture that placed great store on acting in a trustworthy way.

Suddenly, all the heavies are talking about "culture" when it has long been absent from the regulators’ mindset.

Glenn Stevens again:

Finance depends on trust. In fact, in the end, it can depend on little else. Where trust has been damaged, repair has to be made. Both industry and the official community are working hard to try to clarify expected standards of behaviour. Various codes of practice are being developed, calculation methodologies are being refined …

In the end, though, you can’t legislate for culture or character. Culture has to be nurtured, which is not a costless exercise. Character has to be developed and exemplified in behaviour. For all of us in the financial services and official sectors, this is a never-ending task.

David Murray, former CEO of the CBA, 1992-2005 (28 April):

The culture is the sum of a set of beliefs in an organisation and those beliefs are driven by the rules in that organisation, by the strategies and the behaviour of its leaders and governing bodies....

I believe it is counterproductive to attempt to legislate for culture, it is up to individual organisations to get it right and if it is right it can make an enormous competitive advantage to a particular organisation…. If you can't legislate for culture then there is no stick a regulator can use in its place.

Greg Tanzer, ASIC Commissioner (27 May):

There is a need for a cultural shift in the financial industry — and it needs to happen now.…

It is crucial firms recognise performance in a way that not only promotes good conduct but penalises poor conduct as well.… On rewards, ASIC has been saying for some time that one of the issues in the financial advice industry relates to the incentive structures they use.

Greg Medcraft, ASIC Chairman (29 May):

When inappropriate investments become worthless, it is not the wealthy who are being fleeced. So that is why we need to clean up culture because people suffer.… And people are sick of it. They want to have trust and confidence in the institutions they are dealing with.

Wayne Byres, APRA Chairman (29 May):

Culture is a nebulous concept, much more difficult to define and observe than capital adequacy. But strengthening culture, like strengthening capital, is critical to long-run stability.…

It is clear that in many cases, aspirational statements of organisational culture have been no match for the personal incentives that are created for individuals.… [global efforts to build capital and liquidity would make the financial system more resilient] but they will only offer a partial remedy to the problems that were experienced, unless there are behavioural changes within financial firms as well.

What we have here is talk. Gabfests, following which nothing of substance happens. No victims of financial unconscionability/fraud have been adequately compensated. Parliamentary inquiries come and go, with their own remonstrations. And nothing happens.

Labor’s 2012 Future of Financial Advice reforms were a definite step forward, but remain under siege by the Coalition and they are inadequate in themselves (oriented purely to retail customers).

These big shots talk as if the lately discovered cultural problems are an aberration. They fail to confront, in spite of all the evidence, that they are describing elements of the intrinsic nature of the beast.

These regulatory talking heads are an integral part of the problem. They are embedded in the malaise of the banking sector’s culture.

Glenn Stevens
Implicated in the Securency scandal, but curiously absolved. This million dollar a year man has only one instrument to manage (the cash rate). Dysfunctional as is the instrument, Stevens and his team still can’t get it right — vide the current too low rate in Australia.

David Murray
Murray’s role as senior manager then CEO of the CBA, along with long time internal solicitor and general counsel, Les Taylor, was integral in embedding the CBA’s culture as one of profit at any price during the bank’s privatisation process, prelude to the CBA’s current deeply corrupt culture.

Greg Medcraft and ASIC
Medcraft (ex Société Générale) had to be dragged screaming back from his permanent junket overseas to take charge of a moribund ASIC, over which he was titularly chairman.

Medcraft again, on the culture bandwagon. before a Senate Estimates hearing (3 June, tabled document No.7):

ASIC is concerned about culture because it is a big driver of conduct in the financial industry. It is a sad fact that bad culture leads to bad conduct and this inevitably leads to poor outcomes for consumers .....

Medcraft is now making some appropriate noises, but noise isn’t enough. Indeed, it is hypocritical. Nothing has come out of the Senate Economics Committee’s damning (if selective) June 2014 report regarding ASIC’s "oversight" of the financial advisory sector.

But ASIC already has powers that it refuses to use – s12 of the ASIC Act (re business to business unconscionable conduct), legislated 2001. ASIC personnel keep sending letters to bank victims telling them to buzz off – I have copies of such correspondence. Moreover, ASIC continues to ignore the criminal complicity of the Financial Ombudsman Service with bank corruption, although ASIC has formal oversight over the FOS’ operations. ASIC remains unreformed, complicit, unrepentantly so.

APRA
Fairfax journalist James Eyers reports (27 May):

The Australian Prudential Regulation Authority has also been closely monitoring culture in banks and has told boards of directors about the importance of maintaining high ethical standards. APRA's intensified focus on risk and the series of scandals in bank wealth divisions has ensured that the commercial banks in Australia are focused on improving risk culture and avoiding potential regulatory sanctions and damage to their brands from misconduct.

Complete rubbish. Where is the evidence? APRA has the powers to intervene in company operations, but prefers a palsy relationship.

The first time the word "culture" appeared publically was with respect to the NAB’s trading desk cowboys, leading to big losses in 2003. The Australian Prudential Regulation Authority, forced to awaken from its slumber (lassitude regarding the collapse of HIH/FAI insurance), issued a report in March 2004 emphasising the hitherto alien concept — Report into Irregular Currency Options Trading at the National Australia Bank. I provided a background to this report in my October 2010 ‘Illusion and Reality at the National Australia Bank’.

APRA claimed that the NAB had a dysfunctional culture, which it did. The NAB promised to change its game, which it didn’t. Everybody in authority then looked the other way. The concept of dysfunctional banking culture then returned to obscurity.

In May 2012, I emailed APRA inviting it to delve again into the NAB’s ongoing dysfunctional and corrupt corporate culture, providing chapter and verse of supporting documentation. APRA emailed me back in June, telling me to bugger off. Meanwhile, nothing has changed at the NAB.

Thus do the regulators talk and expect miracles to come from somewhere else — or perhaps not.

A recent Fairfax article on the "revolving door" had both senior regulators and private sector consultants argue for the importance of public/private sector exchanges. But several sometime regulatory staff emphasised the downside.

Dr Andy Schmulow (according to the reporter) is...

‘... comfortable calling out what he believes is a sick culture at his former home, APRA.’

Claimed Schmulow:

“I've never in my life experienced such an environment steeped in groupthink, and openly hostile to anything that would challenge whatever their orthodoxies are.”

James Wheeldon, ex-ASIC lawyer, claimed:

“At ASIC, where I saw that revolving door in play … the culture there was not a culture of doing things by the book, it was a culture of facilitating business. And that affected everything. Giving business what they want, and rolling over for business.” Regulators, it appears, have their own dysfunctional cultures. Physician heal thyself.

Barring miracles, I have a recommendation to clean up the banking sector’s culture overnight, a culture hitherto entrenched. Send bank CEOs to gaol.