An industry in the dock
Fallout from the banking Royal Commission
Kenneth Hayne’s 1,000-page report into Australia’s banking industry reads like something of a horror story. The former High Court Justice’s tome drew on a year of testimony that made the word “scandal” seem sorely inadequate.
The worst of the claims had been widely reported as Commission hearings unfolded. Charging for advisory services that were never provided; charging the estates of deceased customers for life insurance; targeting sales of high-interest loans and funeral cover to vulnerable communities with poor literacy skills. Signing up a man with Down’s syndrome for insurance he didn’t understand – and making it near-impossible for him to cancel.
In the early days of the Commission’s hearings, former deputy prime minister Bill Shorten, who had previously argued against the need for a Royal Commission, said: “I was wrong. What I have heard so far is beyond shocking.”
It got worse. Worthless insurance policies were being sold en masse, and vulnerable customers were granted loans that were clearly unsuited to their circumstances. There was impropriety in foreign exchange trading, a blind eye turned to money laundering by drug syndicates, and a failure to meet statutory reporting requirements.
The Royal Commission found that this was not a case of the nation’s banking industry being tainted by a series of shocking anomalies. Rather, these stories reflected an industry fuelled by greed, arrogance and a culture of putting profit ahead of customers.
“In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain,” Haynes said. “Providing a service to customers was relegated to second place. Sales became all-important.”
All of the country’s major banks were implicated in wrongdoing, to a greater or lesser extent. The so-called Big Four were deeply involved. Whistleblowers repeatedly described a toxic culture that meant mis-selling and even bribery were overlooked in pursuit of targets and profits.
Some observers say the seeds of such widespread misconduct – and a lack of policing by the industry’s regulators – were sown a decade ago. When the Australian banking industry escaped virtually unscathed by the global financial crisis, or GFC, by having avoided the high-risk sub-prime mortgages that brought down banks elsewhere, it bred a sense of immortality.
“Some of these bankers started to believe it was due to their genius, they should take the rewards and they took the eye off the ball, which was the customer,” former national treasurer Peter Costello told the Australian in 2018.
Deep changes began to be made throughout the industry even before the Royal Commission finished its hearings. Extensive fines were imposed; the Commonwealth Bank agreed to pay AU$700 million – the biggest fine in Australian corporate history – over breaches of anti-money-laundering and counter-terrorism financing laws. ANZ and several of its executives were charged with criminality relating to a multi-billion-dollar share deal in 2015.
Paying the price
Class actions were launched by groups of affected customers, and heads rolled at some of the biggest banks. AMP chief executive Craig Meller was the first to go, in early 2018, and company chair Catherine Brenner followed shortly afterwards.
When Kenneth Haynes’ full report was published, it was inevitable that others would have to quit. Commonwealth Bank chief executive Ian Narev left the company, and National Australia Bank’s CEO Andrew Thorburn and chair Ken Henry both resigned.
The Haynes report made 24 recommendations relating to dishonesty and misconduct by institutions and individuals, and urged regulators to take the appropriate action. Westpac was the only one of the major banks not on this list. The report also demanded repayments be made to customers.
“Between them, AMP, ANZ, CBA, NAB and Westpac will pay customers … compensation totalling $850 million, or more, for taking money as payment for services that were not provided,” it said.
Banks’ share prices took a huge hit throughout the hearings, with the major banks losing up to a third of their value.
Haynes made 76 recommendations of change to the nation’s banking industry, including an overhaul for the mortgage broking sector, a ban on banks selling superannuation funds, and stronger action on the part of industry regulators. He stopped short of recommending that banks be forced to sell their wealth management businesses, which many observers were hoping for and expecting. Several banks were already doing this before the report was released.
Where to from here?
Such a thorough and public expose of the industry’s dirty underbelly has had widespread implications. Financial services is Australia’s largest industry sector, employing 450,000 people and involving close to AU$3 trillion of people’s savings. Banks also account for close to half of the brand value in this year’s BrandZ Top 40 ranking.
Banks affect all consumers’ lives, and the way they feel about the way banks treat them spills over into their expectations of other businesses. Unsurprisingly, trust in businesses is lower in Australia than in any other market for which BrandZ creates a ranking.
That’s why in this report we explore in some detail Australian consumers’ search for brands they can trust, and the effect of being trusted on the resilience of brands across all categories (see page XX).
We also zero in on the banking brands, looking at how low levels of trust plunged even lower last year, the effect of this on brand value, and why different banks’ brand values were affected differently by the Royal Commission (see page XX).
We discuss where the opportunities lie for banks to rebuild their relationships with consumers, and look at how those brands least affected by the commission’s damning findings – and new challenger brands – are capitalising on current consumer attitudes towards the category.
It is perhaps telling that share prices for the major banks surged following the release of the Haynes report; to some, a sign that the recommendations were not as drastic as had been feared, and to others a sign that a clear line was being drawn between the behaviour of the past and that of the future.