Follow the money. The interim report of the Hayne royal commission demonstrates the importance of applying a very traditional concept in understanding motive and result. Follow the money.
According to Commissioner Kenneth Hayne, the answer to why so much egregious behaviour occurred is far too often fairly simple – “greed” . So selling became the focus of attention for banks and other financial services entities, he says, often the sole focus of their attention.
“From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales,” his report notes, leading to the pursuit of short-term profit at the expense of basic standards of honesty.
This becomes the key to understanding the problem of “culture” that has become the favourite catchphrase – in Canberra as much as the commission – for all that has gone wrong and must be fixed.
“Australians expect and deserve better,” Treasurer Josh Frydenberg declared. “This interim report is a frank and scathing assessment of the culture, conduct and compliance in our financial system.”
Yet that culture has also seemed remarkably hard to address despite years of promises by earnest bank chief executives and chairmen that they were successfully dealing with the issue. And despite the commission’s condemnation of the regulators for not doing their jobs, this view was certainly not shared by the banks at the time.
David Murray, now inserted as saviour chairman of AMP and the former head of the Coalition’s Financial Services Inquiry, was savage about any attempt by former head Greg Medcraft at the Australian Securities and Investments Commission to go down what Murray called “this culture tangent”.
At an Australian Financial Review summit in 2016, Murray described ASIC’s approach as anti-competitive and inefficient and likened the attempt to “enforce culture” to Adolf Hitler. Murray quickly apologised for that reference but he would still argue that culture is a matter for the board and management rather than regulation.
Particularly after the revelations of the royal commission, the public disagrees.
Malcolm Turnbull had responded to growing community anger about bank behaviour when he ruined Westpac’s big birthday celebration lunch back in April 2016 – coincidentally held on the same day as the AFR summit. His stern criticism of the banks argued they needed to publicly demonstrate that their claimed values of “trust, integrity and placing the customers first … must be lived and not just spoken about.”
The potency of that Prime Ministerial message emboldened Bill Shorten to call the following day for a royal commission – and to keep calling for it – as the Coalition resisted until finally forced into it at the end of last year.
The Coalition, including then Treasurer Scott Morrison, has since been forced to admit the government was wrong about the need for a royal commission. As Hayne points out in its interim report, the industry had already been exposed to a welter of complaints and investigations – with 70 public inquiries into the conduct of banks and associated entities under way or finished by the time the commission started. The regulators had also conducted and were continuing to conduct numerous investigations into allegations of misconduct.
Yet nothing has grabbed public attention like the naming and shaming – and often skewering – of individual institutions and their representatives in the stand at the royal commission . What the hearings have also demonstrated is how deliberately tardy and overly legalistic and resistant – on the most generous interpretation – many were in changing dodgy practices and in providing remedies to their customers. Sometimes right up to the clanging of the royal commission bell calling time.
This too usually comes down to following the money, including an extravagant bonus culture from the top down and predicated on increasing short-term profits and revenue.
But this doesn’t answer the issue of what comes now in terms of changing community perceptions – and business reality.
Hayne’s interim report covers only four topics and is not making any formal recommendations until a final report in February. Labor’s demand that this unusually fast paced royal commission be extended seems certain to be ignored by the commissioner. The government naturally says it would accede to any request by him.
But having chosen some individual case studies to examine, the royal commissioner seems determined to finish on the original timetable, clearly confident he has enough material to properly inform his broader judgments.
Despite the apprehension of much of the industry, this doesn’t seem to include a predilection for adding to the existing morass of regulation and legislation supposedly governing the financial services industry.
Hayne makes the obvious point that much more often than not, the conduct being condemned is already against the 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?” his report asks.
He also notes many changes have been announced by financial institutions and regulators in anticipation of the commission and its work. These includes changes in industry structure (such as sales of wealth divisions), remuneration (a bit less money for executives) as well as quicker remediation for customers and abandoning certain products and practices.
That amount of self-correction may still be counted as too little too late.
However, it is almost certain to lead to banks tightening credit available to small businesses and individuals – a trend obvious in the housing market – rather than risk being accused of having lax lending standards. And like any reaction leading inevitably to an overreaction, this is likely to have all sorts of unintended and indirect economic consequences .
But that will become a political problem for later. This is politics now.