Penny finally drops on conflicted financial services system

How could so many politicians, journalists and the BCA have been so slow to understand the problem in financial services?

How could some of the nation’s highest paid executives in a banking system that is the largest sector of the economy fail to have seen the profound conflicts of interest now being revealed by the financial services royal commission?

The big four banks were so well protected during the global financial crisis in 2008-09 that the government — the taxpayers — effectively guaranteed their debt. Yet only a few years later they are revealed to have ripped off those taxpayers to meet key performance indicators in their wealth management arms, recommending products that in some cases they knew were wrong for clients.

And how could so many senior politicians, business journalists, editors and the Business Council of Australia be so slow to have understood the systemic problem: vertically integrated financial institutions managing clients’ money and then recommending investment products from the same institution are hopelessly conflicted?

Alan Kohler summed it up in The Australian last week in a piece about AMP, once a life insurance mutual fund owned by policyholders but now a hopelessly conflicted listed wealth manager: “Financial advice needs to be independent, not the company’s ‘distribution’ arm.”

Same for the banks, which seem likely to exit their wealth management businesses just as the National Australia Bank, ANZ and Commonwealth Bank have sold full or majority stakes in their life insurance divisions. The conflicts of interest are startling as victims tell their stories and bankers answer counsel questions at former High Court judge Ken Hayne’s Melbourne commission.

Even though almost every case aired this month already had been reported to regulators or by investigative journalists, led by Adele Ferguson at Fairfax Media and ABC Four Corners, the focus brought by the compulsory inquisitorial powers of a royal commission has put these scandals in a whole new light.

It looks like the reaction of some bankers to a huge pot of money — the mandated $2 trillion national superannuation scheme that forces workers to save 9.5 per cent of their salaries for retirement — has been similar to the reactions of dodgy construction groups ripping off subcontractors in the Rudd government’s $16 billion Building the Education Revolution or insulation installers led by Melbourne crime gang the Carlton Crew in Rudd’s pink batts scheme. Never stand between a greedy builder, crook or banker and a bucket of money guaranteed by the government.

The grift has extended to getting staff at one financial advice company to impersonate clients during phone calls and falsify sig­na­tures, not just bad practice but ac­tual crimes, as well as billing dead people for monthly advice fees.

Many of us in the media had swallowed the idea we all owned the banks through our super funds and that because banks were paying high fully franked dividend yields their financial health underpinned national retirement incomes. We were wrong and Ferguson deserves every accolade she has received since revelations about the CBA’s financial advice arm driven by whistleblowing former CBA employee Jeff Morris in 2013 and improper behaviour by CBA insurance arm CommInsure she revealed in 2016.

I only wish Ferguson had accepted the job I offered her at this paper instead of going to the Fairfax metros and The Australian Financial Review. It is worth reading her speech to the 2016 Press Freedom Dinner on the importance of whistleblowing and the lengths financial institutions and their spin doctors have been prepared to go to sabotage her investigations and discredit genuine whistle blowers.

Politically the history goes back to Labor leader Bill Shorten’s time as financial services minister in the Gillard government and attempts to clean up the financi­al services mess left by the Storm Financial and Opes Prime collapses. The so-called FOFA (Future of Financial Advice) legislation passed the Senate in early 2012 but by the fall of Julia Gillard in mid-2013 the reforms had not been implemented.

The Abbott government then delayed them for two more years under Finance Minister Matthias Cormann.

During that hiatus, former treasurer Joe Hockey set up the financial system inquiry under former Commonwealth Bank chief exec­utive David Murray in December 2013. It reported in December 2014 and new Turnbull government Treasurer Scott Morrison responded in October 2015.

That report recommended many changes to financial advice and specifically sought the banning of loans in self-managed super funds, one of the big trouble spots in this royal commission where people’s nest eggs have been destroyed by debt inside their funds. The inquiry also recommended separating the selling of financial products from traditional deposit-taking banking roles.

Neither the Abbott nor Turnbull governments showed any real desire to dive in and sort out problems that were becoming increasingly evident. The exception in politics was NSW Nationals senator John “Wacka” Wil­liams, who has campaigned for banking reform for almost a decade and was the only government member to cross the floor before 2017 to vote against his government on royal commission proposals.

For once the Twitter left has been right about bank rorting. Social media activism and the reputational damage it wreaks will force the banks’ hands, whatever the government does.

It is less than a year since the CBA was caught out with more than 50,000 unreported ATM cash deposit transactions possibly used for money laundering. The bank itself thought six of the transactions were linked to terrorism financing but it reported none to Austrac, the federal body monitoring such cash transactions.

In such an atmosphere, tax cuts for big business look like a hard political sell. If Shorten Labor looks like a government in waiting that will do anything the trade union movement wants, it is hard not to agree with the Twitter left’s assessment that the Coalition has been desperate for four years to defend the rorts of its highly paid mates in financial services.

Media critics on the right of politics, especially The Daily Telegraph columnist Miranda Devine, also have a point when they ask why the banks have put so much time into campaigns on workplace diversity, gay marriage reform and indigenous employment but have paid so little heed to their most important “corporate social responsibility”: good and honest service to their customers.

In the end it would be best, as argued by this paper’s economics correspondent Adam Creighton, if the government did not react to the commission’s eventual report with a stack of new banking laws, something a lawyer such as Hayne might be predisposed to. But surely a tougher approach to real competition is needed, as is a more publicly active Australian Securities & Investments Commission.

The Financial Planners Association needs to muscle up and take action against future rogue planners if the industry is to have any credibility.

And banks need a hard look at how they use KPIs. Short-term actions that lift revenue and profit quickly may in the longer term harm a business, as the commission is finding.