The Dirty Banks Down Under

(Bloomberg Businessweek) -- After navigating the 2008 global financial crisis with barely a bump, Australian banks looked to most observers like paragons of virtue. But to Jeff Morris, a financial planner at Commonwealth Bank of Australia, the country’s biggest lender, they were anything but. From his insider’s vantage point, he saw a toxic, bonus-obsessed culture where star employees forged documents and steered unwitting customers into high-risk investments that often tanked. “I watched fleas do over innocent people,” he says.

He didn’t keep quiet about it: Morris first raised his allegations with the Australian Securities and Investments Commission in 2008. Then, believing systemic problems were being swept under the carpet, he took his concerns public in 2013, sparking widespread outrage. Five years later, Australia’s once-lauded financiers finally face their moment of reckoning. A government-ordered investigation into financial wrongdoing that began in March has unearthed a seemingly endless string of scandals, including charging dead people for services, lying to regulators, taking bribes, and dispensing such bad investment advice that some customers lost their homes.

The inquiry has identified thousands of breaches, some of which could lead to criminal charges. Australia’s banking leaders, including Commonwealth Chief Executive Officer Matt Comyn, have apologized profusely. Nevertheless, on top of previous scandals involving rate-rigging, front-running currency trades, and violations of laws to prevent money laundering, the revelations have pushed public and political tolerance to a breaking point.

With misbehaving bankers set to become a key issue in national elections next year, the backlash may only get worse. Australians rank finance as the least ethical part of the economy, according to a recent survey by the Governance Institute of Australia. “Institutions have to think about what the flip sides of financially successful behavior are,” says Fahmi Hosain, former head of culture and governance at the Australian Prudential Regulation Authority, the financial industry supervisor.

Australia’s standout performance during the global crisis may have set the stage for its current troubles: Its banks sidestepped the subprime mortgage losses and government bailouts that marred many of their peers in the developed world, avoiding much of the internal and external scrutiny that might have put a stop to questionable behavior. As former Australian Treasurer Peter Costello, now chairman of the nation’s sovereign wealth fund, said in May at the think tank Centre for Independent Studies: “The banks began to think they were pretty impregnable.” They started looking more at their profits and salaries “and took their eye off the consumer.”

None of the conduct being investigated is particularly unique to Australia. The rate-rigging scandal, for example, echoes the U.K.’s Libor-fixing scheme, and the sales-at-all-costs culture described by Morris has parallels with the fake-accounts debacle at Wells Fargo & Co. in 2016. While those incidents engendered brief periods of popular anger, they’ve largely faded from the public eye amid the dramas surrounding Brexit and Trump.

There are reasons to think Australians will prove less forgiving—for one, the sheer breadth of misbehavior detailed by the so-called Royal Commission investigation. The big four lenders—Commonwealth Bank, Westpac Banking, National Australia Bank, and Australia & New Zealand Banking Group—have all been implicated in one way or another, as has AMP Ltd., one of the biggest wealth managers. That means many Australians know someone who’s been affected by the scandals.

The Royal Commission, described by one former regulator as “almost a prosecution without defense,” has dominated headlines for much of the past six months. The hearings have featured a succession of executives hauled in to answer questions about lapses at their companies. Several wilted under the pressure. Equity analysts are already expecting a more restrictive regulatory environment: They project a 7 percent profit slump at Australian banks over the next 12 months, vs. a 9 percent gain for all companies in the nation’s benchmark stock index, according to data compiled by Bloomberg.

The financial sector is starting to clean house. Commonwealth, National Australia, and ANZ are offloading their wealth management units, where most of the bad behavior is alleged to have taken place. AMP’s chairman and CEO have resigned. The industry has committed to reducing the importance of sales in employee pay and implementing stricter background checks to weed out problem staffers, according to the Australian Banking Association. “I feel like the organization is a much humbler place,” Commonwealth CEO Comyn said after the lender’s annual earnings report in August. “We will remember the issues and what led to them and will make sure those mistakes aren’t repeated.”

Morris, the whistleblower, left his job at Commonwealth after going public with his allegations and is now semiretired. He’s hopeful that change is finally afoot, but he believes much deeper reforms are needed. “There are signs the climate is now starting to go against the banks,” he says. “However, the risk is that we have just pushed the behavior underground for a couple of years.”

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