Decade of Banks Behaving Badly Laid Bare in Australia Probe

(Bloomberg) -- In a quiet courtroom in Melbourne, a decade of scandalous behavior at Australia’s biggest banks is being forensically laid bare.

From lying to regulators, falsifying documents and taking bribes to extracting fees from customers long since dead, the revelations at the quaintly-named Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have shocked and angered the public.

It’s a sharp fall for an industry that largely dodged the opprobrium and hefty fines heaped on U.S. and European banks after the global financial crisis a decade ago, from which Australia emerged recession-free. With a relative lack of political and regulatory scrutiny, bad behavior flourished.

“In terms of exposure to the public, there has never been anything like it,” Allan Fels, who ran Australia’s competition regulator from 1989 to 2003, said in an interview. “The key thing is it has been powerfully conveyed to every Australian. Their attitudes will never be the same and their demands for the government to do something about it are massive.”

Decade of Banks Behaving Badly Laid Bare in Australia Probe

The reckoning could be costly. The government has already announced tough new penalties for corporate wrongdoing and beefed up the regulator’s powers; analysts have trimmed earnings forecasts and even handed out a rare sell recommendation; and once-friendly politicians are calling for the banks to be broken up. The chief executive officer of 169-year-old wealth manager AMP Ltd. quit days after the firm admitted it deliberately misled regulators over charging customers for services they didn’t receive. The chairman resigned Monday.

At the heart of the problems is a fight for the share of the spoils of booming wealth that has made Australian households the second-richest in the world behind Switzerland.

The outsized A$2.6 trillion ($2 trillion) compulsory pension-savings system has spawned an industry of more than 25,000 financial planners competing for an estimated A$4.6 billion a year in fees. Few of these planners have formal qualifications and a recent regulatory review found that in 75 percent of cases, advisers couldn’t show they were acting in their client’s best interest.

From the early 2000s, the big lenders who dominate the market -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. -- snapped up wealth managers, financial planners and mortgage brokers. This allowed them to create financial products and sell them to customers through networks of supposedly independent financial planners and brokers.

Evidence has also emerged of misconduct in the A$1.7 trillion mortgage market, which is dominated by the big four banks. The inquiry heard about mortgage brokers and bankers falsifying documents and taking bribes as they sought lucrative commissions.

Commonwealth Bank, Westpac and AMP may have breached the law on multiple occasions, the inquiry was told last week.

Decade of Banks Behaving Badly Laid Bare in Australia Probe

“The banks didn’t start this way, they’ve just evolved into it,” said Ian Ramsay, professor of commercial law at Melbourne University who headed a recent government inquiry into how the financial industry handled complaints. “To produce products -- whether they happened to be superannuation or a new managed fund -- and at the same time offer advice on that, they were able to get fees all the way through the system.”

“It looked such an appealing model,” he said. “Left behind was the concept of ‘can we compete on the quality of our advice.’”

The consequences have been devastating. The inquiry has heard how people have lost homes and retirement nest eggs after being pushed into inappropriate products that delivered hefty fees to advisers. In one case, a woman was told to shift her retirement savings in a move that would have cost her A$500,000. She demurred.

Banks and financial companies are the second-least trusted industry in Australia, according to research conducted last year by Edelman Intelligence. Less than on-third of Australians trust banks to do the right thing, according to the research, which was conducted for the Australian Bankers’ Association.

Decade of Banks Behaving Badly Laid Bare in Australia Probe

The simmering resentment -- fueled by a sense banks were gouging fees to fuel record profits and sky-high executive pay -- boiled over last year when Commonwealth Bank was sued for systemically breaching anti-money laundering rules, adding impetus to calls for the wide-ranging and powerful inquiry.

The relentless flood of wrongdoing has politicians and business figures who initially opposed the inquiry now questioning whether the banks need to be broken up. Former competition czar Fels agrees.

“Many, many actions are required, but we do need a structural solution as part of a big package of reform,” said Fels, who wants a formal split between giving advice and creating products. “We might not need it if we were totally confident there was a culture of high ethics and legal compliance on the part of the financial institutions. But their actions in recent years have demonstrated they can’t be relied upon or trusted.”

©2018 Bloomberg L.P.