Damning Criticism of Australia Banks Sets Scene for Final Report

(Bloomberg) -- Shareholders in Australia’s big banks shouldn’t get too comfortable.

Bank stocks rallied in relief that the interim report from an inquiry into misconduct didn’t contain any specific recommendations. But criticism ran deep as Commissioner Kenneth Hayne lambasted the banks over their culture, conduct, compliance and remuneration practices. He also took aim at the securities and banking regulators for their timid approach and failure to take court action.

The string of questions and observations made by Hayne in the three-volume document provide ominous clues to the recommendations he may make in his final report due in February.

Here are some of the highlights:

On why misconduct happened:

“Too often the answer seems to be greed -- the pursuit of short-term profit at the expense of basic standards of honesty.”

On why the scandals shouldn’t be pinned on ‘bad apples’:

“That characterization serves to contain allegations of misconduct and distance the entity from responsibility. It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity. It does not contribute to rebuilding public trust in the financial advice industry.”

On the regulators:

“When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.”

“There seems to be a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing.”

“There seems no recognition of the fact that the amount outlaid to remedy a default may be much less than the advantage an entity has gained from the default”

On compliance:

The evidence suggested financial firms did “as little as they thought they have needed to do to meet their legal obligations, offering no (or at best, next to no) encouragement to or reward for staff or third parties to pursue the interests of the consumer. Compliance appeared to have been relegated to a cost of doing business.”

On the failure to verify details on loan applications:

“What was meant by verifying outgoings being ‘too hard’ was that the benefit to the bank of doing this work was not worth the bank’s cost of doing it.”

The way ahead:

“Changing culture in the Australian banks may not be easy and may take time. It cannot be assumed that entities will embrace change willingly or immediately.”

To contact the reporter on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Edward Johnson, Peter Vercoe

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