Banking royal commission: Execs keep forgetting to ask: ‘Is this right?’

For the second time this millennium we are waiting on the outcome of an inquiry into a rolling financial catastrophe.

The Hayne royal commission has heard instances where breaching the law might be considered part of the business model. Picture: David Geraghty

For the second time this millennium the financial services industry and the wider community are waiting with bated breath on the outcome of an inquiry into a rolling financial catastrophe.

Anticipation of strong action against the banks, insurers and wealth managers has built to fever pitch ahead of the Hayne royal commission’s interim report today. As the hearings have rolled on this month a denouement of sorts is expected for an industry whose greed and disregard for the consumer has been laid horribly bare.

But we have been here before.

In 2003 there was a royal commission into the collapse of HIH Insurance that is often credited with setting up a regulatory ­approach that helped Australia avoid the worst ravages of the global financial crisis.

But 15 years on, the evidence would suggest some of its most important findings and insights have been forgotten or overlooked in the first place.

Retired Justice Neville Owen delivered three volumes to the then Howard government resulting in, among other things, an overhaul of the Australian Prudential Regulation Authority, criminal charges for three colourful business characters and the birth of modern corporate governance standards.

But after fulfilling the strict terms of his brief to explain the collapse and recommend steps to reduce the chances of such a cat­astrophe happening again, Owen also had his own observations. They concerned the morality of the people involved in the business and are directly relevant to the conduct the Hayne royal commission has been examining. They should have rung in the ears of the financial services industry that now looks destined for a prolonged period of re-regulation and tough enforcement.

“From time to time as I listened to the evidence about specific transactions or decisions, I found myself asking rhetorically: ‘Did anyone stand back and ask themselves the simple question — is this right?’,” Owen wrote in his personal perspective on the collapse.

“Right and wrong are moral concepts, and morality does not exist in a vacuum. I think all those who participate in the direction and management of public companies, as well as their professional advisers, need to identify and examine what they regard as the basic moral underpinning of their system of values.

“They must then apply those tenets in the decision-making process.

“In an ideal world the protagonists would begin the process by asking: is this right? That would be the first question, rather than: how far can the prescriptive dictates be stretched?”

Owen made his formal recommendations “to diminish the likelihood of such a calamity occurring in the future”.

But as the Hayne train has rolled on it seems clear that the morality question wasn’t asked.

Indeed, the commission has even heard instances where breaching the law might be considered part of the business model.

ClearView discovered that 303,000 outbound calls selling ­insurance — largely to poorer people — were in breach of the “anti-hawking” provisions of the Corporations Act. ClearView chief actuary Gregory Martin told the commission the company didn’t even realise it was breaking the law.

Freedom Insurance ran a high-pressure sales culture that wouldn’t take no for an answer. Of the 28,455 people who called over a 12-month period to cancel their policies because they didn’t want or couldn’t afford them, 20,337 were talked out of doing so.

It seems almost inevitable that there will be new and tougher legislation from the government to show that it is cracking down on abuses in the sector.

Josh Frydenberg has lashed the Australian ­Securities & Investments Commission for not being tough enough on offenders.

“How did this occur on their watch? They were obviously aware of examples of this misconduct but there weren’t penalties issued and the conduct stamped out,” the Treasurer said two weeks ago.

In the same breath he handed them yet more powers, this time to remediate customers, as had been recommended in a capability review completed in 2016.

On Wednesday, Frydenberg and Financial Services Minister Stuart Robert released draft legislation doubling jail terms for white-collar crimes and increasing fines five-fold to $1.05 million. Robert said yesterday he hoped to work with new ASIC chairman James Shipton on “greater volume and greater ferocity of prosecutions”.

Legislation giving ASIC new product intervention powers and placing obligations on business to ensure the design and distribution of financial products are targeted at the right people — both coming from David Murray’s Financial System Inquiry in 2014 — are also working their way through parliament.

That is merely the latest in what is a growing list of legislative and regulatory responses.

Owen was alive to the risks of a “dirigiste” approach to regulation 15 years ago, and wary of its value.

“There is no doubt that regulation is necessary: peace, order and good government could not be achieved without it. But it would be a shame if the prescription of corporate governance models and standards of conduct for corporate officers became the beginning, the middle and the end of the decision-making process,” he said.

“The end of the process must, of course, be in accord with the prescriptive dictates, but it will have been informed by a consideration of whether it is morally right. In corporate decision-making, as elsewhere, we should at least aim for an ideal world.”

Owen’s was a very different inquiry into a different set of events. He looked into the detail of Australia’s biggest ever corporate collapse in March 2001. Although just one group, as the second-largest insurer in the nation its failure had a seismic effect on the economy, knocking half a per cent from growth and seizing up parts of society.

As the largest provider of public liability, travel, professional indemnity and builders’ warranty insurance, HIH’s collapse spark­ed a national crisis.

Local councils could not insure accidents in public spaces, builders downed tools. Hundreds of people with income protection policies suddenly lost their only source of income.

Hayne’s inquiry, by contrast, has been sampling from bad behaviour across everything from personal and business banking to life and funeral insurance, wealth management and superannuation.

Justice Owen found the HIH collapse was not caused by fraud and embezzlement. Rather it was the repeated efforts to paper over the cracks of past decisions and past acquisitions that drained its reserves and left it unable to meet liabilities.

Owen recommended criminal charges that resulted in three people going to jail — chief executive Ray Williams, director and former controlling shareholder in FAI Insurance Rodney Adler and businessman Brad Cooper. He found that APRA did not cause or contribute to HIH’s collapse, but it did not recognise the seriousness of the situation or question the reliability of the information it was receiving until too late. Among other things, he said APRA’s non-executive board should be replaced with an executive group.

Owen’s inquiry also sparked wider reforms, with the Australian stock exchange issuing its principles of good governance and best practice recommendations in March 2003.

The true cost of the conduct uncovered by the Hayne inquiry is yet to be tallied, but is already comfortably into the billions of dollars just in remediation payments by financial institutions.