A Royal Commission into banking in Australia has found widespread misconduct which it blames on “the pursuit of short term profit at the expense of basic standards of honesty.” The interim report says:
“When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.
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.
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.
Infringement notices imposed penalties that were immaterial for the large banks.”
The more than 600 pages long interim report raises some 600 questions, after detailing instances of bribery, fraud and boar-level deception.
“In September and October 2015, [National Australia Bank] NAB received two anonymous calls from whistle-blowers. These whistle-blowers told NAB about certain practices alleged to have taken place in Greater Western Sydney branches of NAB, including alleged bribery…
In December 2015, KPMG was engaged to conduct an investigation in relation to the allegations… KPMG noted that NAB’s Forensic Team had identified: unapproved Introducers introducing new customers to the lending managers; loans being approved on the basis of potentially fraudulent documentation (such as forged pay slips); and bankers accepting payments from unapproved Introducers. KPMG said that there could be about $50 million of loans with ongoing serviceability issues.”
The investigation further showed instances of “knowingly accepting falsified documentation in connection with home loan applications.”
In many other case studies following witness testimony over 60 days the report finds instances of banks continuing to charge the deceased, applying informal overdrafts with high charges, selling complex financial products to highly vulnerable people, and many other instances of misconduct.
The Royal Commission will now hold further consultations before arriving at recommendations, with Australia’s Prime Minister calling for the Australian Securities and Investments Commission (ASIC) to prosecute bankers.
According to the Royal Commission, the root cause appears to be a complete lack of competition and a significantly skewed balance of bargaining power. The interim report says:
“Banks’ dealings with customers seek to minimise risk to the bank. The bank fixes its risk appetite. It decides to whom it will lend and on what terms. It decides whether security should be provided and what form and value it should take.
Hence, banks have only as much ‘skin in the game’ in their dealings with customers as the bank chooses. And there is always a striking asymmetry of power and information between bank and customer that favours the bank.
Important deterrents to misconduct are, therefore, missing from the banking industry. Competitive pressures are slight. Fears of the enterprise failing are eliminated as far as possible. Fears of failure of particular transactions are mitigated by banks writing the terms on which the deal is done and then taking security against the customer’s default.”
Banks, therefore, can behave as they please with the findings in this report likely the tip of the ice berg as it does not look into investment banking or compliance with money laundering regulations, but only at more consumer facings aspects.