Banking royal commission: Corporate rip-offs a wake-up call

The AMP shellacking has served as a giant wake-up call to corporate Australia and indeed the entire regulatory system.

AMP chair Catherine Brenner. Illustration: Sturt Krygsman

The AMP shellacking has served as a giant wake-up call to corporate Australia and indeed the entire regulatory system because something has gone drastically wrong. Big business has been caught systematically ripping off ignorant consumers to maximise profits and, of course, along the way executive pay.

Yesterday, Commonwealth Bank told the royal commission that despite profits of about $10 billion it simply did not have the systems in place to be able to track which clients had been overcharged.

This explained the two-year delay in notifying ASIC that it had charged clients for no services, which subsequently resulted in $118.5 million in refunds. Such lax administration may be rectified but it beggars belief that Australia’s biggest company can let this happen, and also what that tells you about its client care.

Scott Morrison was quick to foreshadow jail time for recalcitrant executives, but the Treasurer, like the rest of us, may suffer the inevitable result of this abysmal complacency by the financial services industry.

UBS analyst John Mott has foreshadowed the end result being tighter regulatory standards and bank controls, which means fewer home loans and there goes the housing market.

After all, ASIC and APRA are responsible for AMP and the banks from the board chairs down to the tellers and, somehow, they have let complacency replace compliance in the shortsighted hunt for profits.

Long-term sustainable profits are best achieved by complying with the letter and intent of the law, while also serving customers better than the bank next door.

This column admittedly was not originally a proponent of the royal commission but now acknowledges it was wrong, as this week’s evidence has been stunningly successful in proving the value of a well-managed process from Kenneth Hayne and his team.

All the business talk about putting customers first can now be seen in a different light and clients, too, should get a wake-up call and learn they must take the initiative to keep the charlatans honest.

Big business won’t be knocking down the doors to help the offenders work out ways to cut their profits and executive bonuses.

The AMP events covered this week have been under review by ASIC for the past 12 months and the amounts of money in question are not large, but that’s not the point.

In this case, AMP chair Catherine Brenner was neatly included, with a focus on her role in trying to protect her chief executive.

But what, may one ask, was she and the board doing to protect customers from an executive team systematically working out ways to rip off ignorant consumers?

AMP’s evidence this week has sent its stock price down 7 per cent, or close to $1bn, this week.

Hopefully APRA’s coming report on the culture at CBA will help shine a light on how the inaction of boards had led to the failed processes.

Obviously, the financial services sector is in the spotlight and most at risk, but if the rest of business thought that somehow the same issues don’t apply to it then it is badly mistaken.

Companies talk a lot about putting customers first but they actually have to do it and be seen to do it, which for many in big business will require a massive cultural change.

It starts at the top.

Take a bow Michael Hodge, counsel assisting the royal commission for shining the spotlight on what is wrong with the system and, in doing so, justifying the need for an inquiry.

Like any barrister, he is a master salesman and his count of the 20 times AMP has lied to ASIC all relate to the same historical event, albeit a particularly heinous one in which the company has charged people for services it didn’t perform and, worse, conspired to work out ways to continue to charge them for nothing.

No wonder the financial advice industry faces such a credibility gap when the failing doyen, AMP, admits to this sort of behaviour.

The kneejerk calls for a longer commission and more powers for ASIC are wrong; ASIC and, indeed, APRA should be held to ­account for not administering the powers they have.

The evidence presented by Hodge encapsulated what has been sitting on ASIC’s desk for 12 months as its 60 officers fought over every crossed “T” and dotted “I” with the high-priced lawyers AMP employed.

ASIC has the powers: it just struggles to use them. Although, it must be said, its call for the power to order remediation deserves some clarification.

The fact AMP has high-priced lawyers fighting the regulator every step of the way makes you wonder where its heart really lies, as does board time spent on whether and how to include chief executive Craig Meller’s name in a report to ASIC.

One would think the board has other matters to focus on.

The cultural change required needs to be widespread so that it creates an environment in which people right down to the shop floor can speak up and express their views on what is going on at the company. It starts from the top and needs to be enforced.

Plainly, it is not working now because companies are looking at short-term profits and their executive remuneration and not creating a long-term sustainable enterprise.

Korda’s case

Next week, before a registrar in the NSW Supreme Court, administrators Korda Mentha will start 30 days of hearings to work out ­exactly what happened at Arrium before its administration in April 2016.

Korda’s lawyer ABL has instructed Peter Wood and Tom O’Brien to interview the people involved, including former Lazard adviser Lachlan Edwards, former company chairman Gerry Maycock and chief Andrew Robert.

Public investigations are available to all administrations but Korda rarely uses them, which suggests it is still trying to work out just what happened to the money.

Early in 2016 the company received a refinancing proposal from Blackstone affiliate GSO and KKR, the former involved paying the banks 45c in the dollar on the $2.8bn in bank debt outstanding. The banks declined the offer and the company went into administration.

Indeed, the company argued that the banks refused to even negotiate the issue. So Korda wants to know why the company drew down $400m in bank debt if it also knew it had a refinancing proposal that would only give the banks 45c in the dollar.

Then there is the issue of if and when the company was insolvent, and for just how long this had ­occurred.

These will be among the issues to be discussed.

The Whyalla steel mill has been acquired by GFG’s Liberty House Group for about $700m and the prime MolyCop asset was sold to American Industrial Partners for $1.6bn.

All of this means the banks collected more money than they were ever going to get from GSO.

Arrium’s problems included expanding at the height of the mining boom in a series of debt-funded deals when iron ore was selling at $US110 a tonne in 2014 compared to a low of $US40 a tonne in 2016. The price has since headed up around the $US65 mark.

Net debt as at June 2015 stood at $1.8bn, of which $900m was due by July last year.

Revenues fell from $1.6bn in 2014 to $889m in 2015 with profits falling over the period from $296m to a loss of $7m.

As events transpire, the company figured the recovery in the iron ore price would have cemented a plan in which debt would have disappeared in five years.

The suggestion then being that the banks panicked.

The hearings starting next week will provide the answers and decide what action should follow.