Royal Commission: The banks decided their own punishment and gave hollow promises to do better

Kenneth Hayne
  • The financial services royal commission interim report says the banks went the edge, and often beyond, of what is permitted in the name of profit.
  • When found out, the regulators allowed the banks to apologise for misconduct and promise to do better.
  • Annual profit has become the only defining measure of success of Australian banks.

A key part of the culture which allowed banks to take a customer’s money when they weren’t entitled, such as charging dead people for advice, is the role of regulators APRA and ASIC.

The financial services royal commission interim report shows how the banks were generally allowed by the regulators to suggest the wording of statements announcing misconduct and to negotiate penalties which had no material impact.

In short, misconduct was managed with an apology, promises to do better, but little more than that.

In the 10 years to June this year, ASIC’s infringement notices to the major banks have amounted to less than $1.3 million.

In 2017, the Commonwealth Bank declared a profit of $9.93 billion, or about about 7000 times greater than the decade of combined fines of the big banks.

For financial advisers, ASIC’s approach to misconduct was to ban 229 advisers over 10 years in an industry that has 25,000 operators.

The report says ASIC’s starting point when misconduct is revealed appears to have been: How can this be resolved by agreement?

Banks have a special position in the economy and are licensed by APRA, the prudential regulator. They have little competition because barriers to entry are high and everyone needs a bank account.

“Like any commercial enterprise, banks seek to maximise profit,” says the interim report.

“Having survived the Global Financial Crisis, and being prudentially regulated against failure, annual profit has become the defining measure of success of Australian banks.

“That measure has been justified as being in the interests of shareholders and, because superannuation funds hold bank shares, as being in the interests of all Australians.”

But pursuit of profit trumped consideration of how the profit was made because there was little threat of failure and not much in the way of competitive pressure.

“The banks have gone to the edge of what is permitted, and too often beyond that limit, in pursuit of profit,” says the interim report.

The royal commission this is because:

  • The banks can
  • And they profit from the misconduct.

“Risk to reputation was ignored,” says the interim report.

“Discovery of misconduct was ‘managed’ by words of apology and promises to do better. But little more was done than utter the apology and make the promise.

“More often than not, remediation programs were eventually set up but usually after protracted negotiation. Profit remained the informing value.”

When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done, the report says.

“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court,” says the royal commission.

“Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct.”

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