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Five pillars of financial crime (part 3)

By Dr George Venturini

While the scale of illegality and unethical behaviour in the Australian financial sector might be news to many Australians, the scale of fee-gouging, profiteering and the terrible treatment of customers should be no surprise to our regulators or politicians.

Organisations like the Australia Institute, the Consumer Action Law Centre and the Public Interest Advocacy Centre have for more than a decade tried to draw attention to the outrageous amounts of money Australians must pay to withdraw money from an ATM, use a credit card, or have their compulsory retirement savings managed on their behalf.

Not only has the finance industry fought tooth and nail to prevent the introduction of stronger laws that protect consumers from greed, but successive governments, Treasury secretaries and financial regulators have fallen for the banks’ argument that “light touch” regulation is in Australia’s best interests.

Denniss again: “The $2.7tn of Australian citizens’ money tied up in superannuation is often used as evidence of the strength and competitiveness of the Australian finance sector but, of course, nothing could be further from the truth. The only reason the Australian finance sector manages one of the largest pools of retirement savings in the world is because Australian consumers have no say in it…

“The enormous profitability of the Australian finance sector is built on a spectacular contradiction in the way the system is regulated. On the one hand, legislation forces Australians to give compulsory super contributions to the finance sector to manage. But at the same time, Australian policymakers and regulators have pretended that the same workers who can’t be trusted to decide how much to save, can, however, be trusted to decide which financial institutions will do the best job of managing those savings.

Put simply, the Australian finance sector is based on the very worst combination of government dictate when it comes to the amount that must be saved and neoliberal laissez-faire on how those savings are to be managed. And as the royal commission has shown, were a stressed and busy worker to seek out a financial planner to help them avoid the rip-offs, there is a good chance that financial planner would rip them off too.”

The profitability of the Australian finance sector is built on high fees, useless products, compulsory purchases, weak regulation and even weaker regulators. There is no technological reason the profit margin of Australian banks is so high – the explanations are entirely ‘cultural’. As Commissioner Hayne has shown, the ‘culture’ of the Australian finance sector is one of greedy suppliers and weak regulators.

“The neoliberal idea that “free markets” would deliver more for individual consumers and the economy than “red tape and regulation” was popularised by films like Wall Street, and embraced wholeheartedly by proponents as diverse as Paul Keating and the Institute of Public Affairs. But the Financial Services Royal Commission has provided clear proof of what the sceptics have been arguing for decades: Greed isn’t good for anyone – except the greedy.” (R. Denniss, ‘It is greed that has led Australian banks to steal from dead people,’ The Guardian, 3 October 2018).

Commissioner Hayne was in no doubt why it happened.

“The root cause was greed; the greed of both licensees and advisers,” he remarked.

Licensees treated the provision of ongoing services as a matter of no concern to them.”

As the Royal Commission revealed, even when people died, fees continued to be taken out of their accounts – sometimes for years.

As the Report noted: “Even in those cases, the licensee did not terminate the adviser’s contract for dishonesty.”

Clients, or their representatives, did not complain about fees being taken from accounts on which no service was provided “because the fees they paid were being charged invisibly.” The banks and A.M.P. were doing nothing to stop this behaviour.

“No-one has been subjected to any formal public process of investigation, finding and punishment for this conduct,” the Report noted.

“Only at the last minute, before the Royal Commission hearings began, did enforceable undertakings yield public (and then very limited) formal acknowledgement from entities that A.S.I.C. had ‘concerns’ about their conduct and that those concerns were ‘reasonably held’. Even when the commission was taking evidence about the issue, the licensees had not made good their defaults by compensating all affected clients.”

“Regulatory responses focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry,” Commissioner Hayne wrote.

“That set the tone for future approaches to misconduct by financial advisers, that is, to compensate customers according to arrangements negotiated with ASIC while requiring few changes to the business itself.”

Commissioner Hayne pointed out that A.S.I.C. has not used its civil penalty provisions in the five years before the head of its financial adviser’s team gave evidence at the Royal Commission.

As for the Financial Planning Association and the Association of Financial Advisers, Commissioner Hayne said: “Neither plays any significant role in maintaining or enforcing proper standards of conduct by financial advisers.”

It was not – as Commissioner Hayne noted – bad behaviour by only a few bad apples.

“Preventing improper conduct (and promoting desirable conduct) is a central task of management at every level: from the most junior supervisor to the most senior executives and the board,” he wrote.

At the heart of the problems in the financial planning industry, is the conflicted payment model where advisers are paid to sell products rather than advice. Commissioner Hayne’s view is quite clear: “Sales staff can be rewarded by commission; advisers should not be,” he said. (A. Robertson, ‘Banking royal commission’s scathing assessment of industry with more than just ‘a few bad apples’, A.B.C. news, 29 September 2018).

The Interim Report Executive Summary continued: “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.”

A.S.I.C. acted as a guard dog tamed by thieves. That is the unflattering picture of the Australian Securities and Investments Commission painted by the banking royal commission. But is it true?

A.S.I.C. is meant to watch over Australia’s financial institutions, by protecting customers and keeping banks and finance institutions in check. It is styled by Prime Minister Scott Morrison as the “tough cop on the beat.”

But the release of the Commission’s Interim Report painted a markedly different picture of the corporate watchdog. It is too cosy with the big end of town and too lenient in its meting out of justice, the Report suggested.

In short, the watchdog is all bark and little bite.

The trouble with the regulator is that it became too big, and too flaccid, by growing to a size and assuming functions in almost the entire financial system.

The regulator began its life in 1979 as the National Companies and Securities Commission, responsible for overseeing companies and enforcing company law. This brought some concentration of interest in the high-flying world of mergers, acquisitions and business deals, which until then had been within the jurisdiction of the individual states and territories. Yet, for a long period, both states and territories maintained some control.

In 1991 the N.C.S.C. became the Australian Securities Commission, with the states and territories fully surrendering their power to the federal agency.

A.S.C. was further enlarged in 1997, in response to the Wallis Report (Financial System Inquiry Final Report. 31 March 1997), a review of the financial system conducted by committee chaired by businessman Stan Wallis. (‘The Wallis Report on the Australian Financial System: Summary and Critique’, Research Paper 16 1996-97, Phil Hanratty,
Economics, Commerce and Industrial Relations Group 23 June 1997, The Wallis Report on the Australian Financial System, aph.gov.au, Research Papers 1996–97).

The Australian Securities Commission was renamed the Corporations and Financial Services Commission and took on, as then-Treasurer Peter Costello said, a much wider ambit of covering “market integrity, disclosure and other consumer protection issues.”

It ceased to be simply a corporate regulator. In addition, it gained jurisdiction over large areas of the increasingly important financial services sector.

In 1998 it was renamed as Australian Securities and Investments Commission and took on gained even greater responsibility for protecting consumers in the relatively new sector of superannuation, insurance and retail banking.

In 2010 A.S.I.C. received even more power: over trustee companies, consumer credit and finance brokering, as well as for supervising trading on newer financial products such as ‘derivatives’ and ‘futures’.

Over a forty years period what began as a national regulator of companies became the primary supervisor of Australia’s multi-billion-dollar financial services industry.

The larger and more important became the sector, the quieter, tamed and bite-less the regulator became.

It is not that the regulator lacks power. On the contrary, it has many means at its disposal.

If need be, A.S.I.C. has compulsory information-gathering powers. In certain cases, it may apply for a search warrant, which will then be carried out by the Australian Federal Police.

In the presence of violation of the law, A.S.I.C. can issue fines, start legal proceedings, or negotiate an ‘enforceable undertaking’. In specific cases, A.S.I.C. can also ban people from certain industries, such as financial advice.

The greater the powers, the more difficult has become the struggle to exercise them.

Commissioner Hayne dedicated almost forty pages of his Interim Report to regulatory failings, and A.S.I.C. bore the brunt of this criticism.

He found A.S.I.C. was too cosy with the big players in the industry and punishments it meted out were rarely a deterrent.

According to A.S.I.C., the big four banks and A.M.P. have agreed to repay $216 million to 306,000 customers.

The Commissioner complained that A.S.I.C. rarely took businesses to court, instead preferring to negotiate an ‘agreement’ with the investigated business as punishment.

Commissioner Hayne said: “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. Enforceable undertakings might require a “community benefit payment”, but the amount was far less than the penalty that ASIC could have properly asked a court to impose.” (P. Martin, ‘Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’, theconversation.com, 28 September 2018).

In one case, for instance, A.S.I.C. handed CommInsure a $300,000 fine for ‘misbehaviour’ that could have earned a maximum $8 million penalty. It even asked the investigated insurer if it thought that sum was appropriate.

One of A.S.I.C.’s obstacles apparently on the way to exercise the functions mandated by the laws is in the difficulty of proving intent to act dishonestly rather than facing a minor obstacle such as proving that a business activity led to a misleading conduct. (Killian Plastow, ‘ASIC, the mega-regulator failing to keep our banks honest,’ Money Finance News, 2 October 2018).

As for the Australian Prudential Regulation Authority, A.P.R.A. the independent statutory authority which is called to supervises institutions across banking, insurance and superannuation and to promote financial stability in Australia, Commissioner Hayne complained that the regulator 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. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.”

As to the second question: “What can be done to prevent the conduct happening again?” the Commissioner said:

“As the Commission’s work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements. These include announcements about new programs for refunds to and remediation for consumers affected by the entity’s conduct, about the abandonment of products or practices, about the sale of whole divisions of the business, about new and more intense regulatory focus on particular activities, and even about the institution of enforcement proceedings of a kind seldom previously brought. There have been changes in industry structure and industry remuneration.

The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’. Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

Should the existing law be administered or enforced differently? Is different enforcement what is needed to have entities apply basic standards of fairness and honesty: by obeying the law; not misleading or deceiving; acting fairly; providing services that are fit for purpose; delivering services with reasonable care and skill; and, when acting for another, acting in the best interests of that other? The basic ideas are very simple. Should the law be simplified to reflect those ideas better?

One most attractive answer to the question: “What can be done to prevent the conduct happening again?” is: break up the banks!

It is a possibility that Commissioner Hayne has contemplated.

While most of the questions relate to specific details of the banking practices examined in the hearings, Commissioner Hayne has also taken a step back to look at the banking system as a whole. In his executive summary, Hayne posed the question:

“What can be done to prevent the conduct happening again?”

The number one answer to that question is break up the banks!

Virtually all of the misconduct examined by the Royal Commission stems from the banks being too-big-to-fail conglomerates of multiple financial services businesses.

If commercial banks were separated from investment banking, they would not be able to do the trading in securities and derivatives on mortgages which made them lower their lending standards and even commit fraud so they could increase their mortgage lending.

Without the incentives to concentrate most of their lending into speculating on the housing bubble, they would have more interest in lending to, and take the necessary care of their small business and farm customers.

If commercial banks were not vertically integrated with wealth management, stockbroking, insurance and superannuation, they would not be able to fleece customers with financial advice which lures them into buying products and investments from the other businesses that the banks own.

If the banks were broken up, and commercial banks were only allowed to take deposits and make loans, and were kept separated from other financial services and speculation, the financial system would be much simpler, and therefore the regulators would be better able to perform their statutory function. The banks would not be too big to fail, so A.P.R.A. would not be able to use “financial stability” as the excuse for allowing the banks to violate the law with impunity.

Commissioner Hayne was aware of the precedents for structural separation. He wrote:

“In considering these issues it is important to recognise that legislative regulation of the structure of the banking industry is not unknown. From time to time, overseas jurisdictions have limited not only the kinds of transaction, but also the affiliations with other firms, that banks may have. The United States Banking Act of 1933 (a statute enacted by the United States Congress which established the Federal Deposit Insurance Corporation and imposed various other banking reforms. The entire law is often referred to as the Glass–Steagall Act, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama) sought to separate commercial and investment banking. In 2013, the UK enacted the Financial Services (Banking Reform) Act 2013 requiring banks to ‘ring fence’ certain ‘core activities’ by 2019. These references are not to be misunderstood. They are not to be read as my suggesting that either of these laws could be, or should be, directly imported and applied here. But the point of immediate relevance is that structural regulation of banking activities is not novel.” (The Interim Report, Vol. 1, Ch. 9, Sec. 5.7, on business structures, at p. 323)

On 25 June 2018 Mr. Bob Katter, the Member for Kennedy, introduced the Banking System Reform (Separation of Banks) Bill 2018.

Commissioner Hayne concluded his Executive Summary as follows: “This Interim Report seeks to identify, and gather together in Chapter 10, the questions that have come out of the commission’s work so far. There will be a further round of public hearings to consider these and other questions that must be dealt with in the Commission’s Final Report.”

On its part, the Australian Labor Party announced on 2 October 2018 that it would hold its own hearings for victims of banks and financial institutions through a Labor will flush out more victims of the banks and other financial institutions by holding a series of roundtables in cities and towns that have not been visited by the royal commission.

The Leader of the Opposition announced that Ms. Clare O’Neill, the Shadow minister for Financial Services Clare O’Neil will preside over these meetings. Mr. Shorten said that the hearings would give victims the “opportunity to share their stories and consider options for reform to ensure that the shocking misconduct exposed by the Royal Commission is stamped out.”

The Opposition argues that the Hayne Commission should be given extra time. The government left the matter to a decision by Commissioner Hayne who, on the other hand, had not up to time indicated that he wants more time for his inquiry. (M. Grattan, ‘Labor to hold its own ‘hearings’ for bank victims’, theconversation.com, 2 October 2018).

What s likely to remain, as a primary cause of the decade-old malpractice governing the industry and surrounding collaborators – as eloquently shown by K. Lee is ‘The incestuous relationship between government, the financial sector, the regulators, and the legal firms the use’, theaimn.com, 3 October 2018).

Continued Wednesday – A cast of characters: John Kerr (part 1)

Previous instalment – The five pillars of financial crime (part 2)

Dr. Venturino Giorgio Venturini devoted some seventy years to study, practice, teach, write and administer law at different places in four continents. He may be reached at George.venturini@bigpond.com.au.


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  1. DrakeN

    One impression that I hold, and which was confirmed by the Royal Commission, is that there is informal collusion on a grand scale dictating the retention and expansion of wealth by a coterie of financial manipulators who view themselves as somehow separate from and superior to the mass of humanity.
    It is nebulous in appearance, but like a golden orb spider web it is strong enough sufficiently interconnected within itself to ensnare and devour those who encounter it.

  2. Diane

    The systemic, unconscionable, corrupt behaviour by the 4 major banks knows no bounds, nothing will change with the bad culture of these crooked banks, as they seem to be a protected species by politicians,regulators, AFCA, etc, you only have to look back on the Clayton’s version of the banking Royal commission to realise that. The RC was a complete farce, set up by the politicians, and the bankers to suit the bankers, completely overlooked the worse cases, which was small business, 10.000 submissions, only 27 victims got their chance to tell their stories, the more harrowing stories are small business, the politicians, and the crooked criminal bankers want to keep that buried.
    Time for real reform, and to pay back stolen goods to ALL victims.

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