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31 March 2015

The Australian banking sector: Predatory and untouchable

The Australian banking sector is dominated by corrupt organisations that also run banks on the side, supported by a craven, supplicant media and political establishment.

The NAB has currently been exposed as running a corrupt "wealth management" division.

The National Australia Bank is a corrupt organisation. It also runs a bank on the side. But running a bank is an essential vehicle for the former – possessing a banking license gives one carte blanche to engage in corrupt practices.

The NAB has concurrently been exposed, through its British Clydesdale subsidiary, as imposing on small business (SME) and farmer borrowers unconscionably constructed loan facilities. The facilities, long-term fixed interest rate, were marketed as protecting borrowers against potential rate increases. But the costs and risks of the lender’s hedge (or claimed hedge), ill-explained, were to be borne by the borrower.

With the GFC, official market interest rates plummeted to near zero. The borrowers were on the wrong side of the interest rate "swap" and the "break costs" to the borrower sky-rocketed (caveat emptor said the bank). At the same time, operating conditions became more difficult for business. Clydesdale (along with other banks that had flogged a comparable faulty product) has since engaged in widespread foreclosure and customer asset appropriation.

The NAB has been engaging in unconscionable or fraudulent practices against its SME/farmer customers since at least the mid-1980s. If the NAB is the most consistent malpractitioner, the CBA joins it at the top of the list with intermittent large-scale scams — from the 1980s foreign currency loan imbroglio, to underpinning the Storm Financial managed investment scam and directing the unconscionable foreclosure of hundreds of BankWest customers after its purchase of BankWest from HBOS in late 2008.

However, no bank has a clean record. The second tier has seen what is possible and is mimicking its elders.

Recently, we have been witness to reportage of "incidents", variously described by bank spokespersons as misadventures, rotten apples, etc. The carnage amongst victimised recipients of "financial planning" advice and unscrupulously constructed "investment portfolios" is now a regular feature of media reporting.

The domain of SMEs/farmers is less well reported, not least because of the complexity of the stories that taxes even the most interrogative of journalists and limited space on allocated media slots.

Fairfax journalist Elizabeth Knight recently commented (with respect to the CBA kickback scandal involving senior IT personnel) that:

'The larger question that will be asked around this latest banking scandal is the culture of this industry that seems to attract more than its fair share of poor behaviour.'

Quite, to put it mildly and belatedly. The 2004 APRA report on the NAB’s 2003 trading desk scandal highlighted the NAB’s dysfunctional culture. With a change of CEO and Board chairman the NAB promised change, but it continued with business as usual. The APRA report has been taken down from the NAB’s website.

The proximate cause of the scale of investment advisee and SME/farmer casualties is the asymmetry of the bank lender/adviser-customer relationship.

In the former case, the asymmetry is leveraged on the ignorance, naiveté and susceptibility of the would-be retail investor.

In the latter case, the asymmetry is centred on a medium to long-term relationship forged on loan facilities (perennially not fit for purpose) that give the lender near total discretion over the terms of the relationship.

In both cases, the asymmetry is enhanced by the fact that customers come to a bank expecting professionalism (competence and ethical standards, as per visit to a doctor) but are confronted by personnel of a quite different character. The loosening of standards began as early as the late 1960s, continuing during the 1970s.

The root cause of the problem is the uncritical deregulation and privatisation of the financial sector, coupled with a parlous maladministration of the merger provisions of competition law.

Comprehensive deregulation and privatisation were legitimised by the 1981 Campbell Report. Sole emphasis was laid upon the evolving dysfunctionality of the then regulatory structure. Suffused by ideological catechisms, the Campbell Report neglected entirely the history of the finance sector in Australia, leave alone those overseas, which history pointed indubitably to the necessity for a detailed re-regulation of this pivotal sector appropriate to the prevailing environment.

Exposure of corrupt practices during the 1980s led to the diversionary 1991 Martin Inquiry which ultimately legitimised ‘self-regulation’ by the banks in the form of a banking ombudsman and a code of banking practice. The Code has been strategically neutered and the Financial Ombudsman is, with minor pro-victim deliberations, generally in bed with its bank financiers.

So how does it now work in the neglected SME/farmer domain?

A bank will, at its discretion, default a borrower. It calls on a coterie of partners in the enterprise, all corrupted on the drip of bank largesse. Enter the panelled law firms, the valuers, the receivers, selected real estate agents.

All customer assets (including the family home) will have been taken as security, possibly also family assets via guarantees. The defaulted borrower will face litigation penniless. The bank will seek summary judgement for appropriation of customer assets, denying a hearing for borrower counter-claims.

The defaulted customer will face a court not sympathetic to her/his claims, courtesy of an impoverished legal culture rooted in the law of contract, and a judiciary imbued with calculated ignorance and/or complicity with bank lender interests.

It is not improbable that the bank will sell borrower assets under value, manufacture a residual borrower debt, pursue the borrower to bankruptcy and thus ensure that the borrower is denied access to the courts for any counter-claim. The bank will then claim the manufactured bad debt write-off as a tax deduction.

Meanwhile the relevant regulators (especially ASIC) and bureaucracy (especially the federal Treasury) are missing in action. And the political class, save for a handful of uninfluential exceptions, maintain a cowardly silence.

After thirty years of this scam in operation, there is in the hinterland a despair and a fury that is widespread and deep.

The law of the jungle prevails, legitimised by the authorities. It is long overdue that the relevant regulators, bureaucrats and our elected representatives confronted this crisis and earned their pay in reining in this predatory sector.