How Misbehaving Australian Banks Are Causing Global Pain

(Bloomberg) -- Years of scandals have caught up with Australia’s big banks. A government-appointed inquiry into bank misconduct has lambasted the lenders for pursuing profit at the expense of basic standards of honesty. An interim report by the inquiry, known as the Royal Commission, has exposed a laundry list of wrongdoing, from extracting fees from dead customers to lying to the regulator. With politicians promising action ahead of a national election next year and the final report not due until February, the pain is far from over. Already this year, more than than A$38 billion ($27 billion) has been wiped off the market value of the big four banks and wealth manager AMP Ltd.

1. Why is there an investigation?

Australia’s four biggest banks -- Commonwealth Bank of Australia, Westpac Banking Corp., National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. -- have been plagued for years by scandal. Accusations run the gamut from giving misleading financial advice to trying to manipulate a benchmark interest rate. Simmering public resentment -- stoked by a sense banks were gouging fees to fuel record profits and executive pay -- boiled over in 2017 when Commonwealth Bank was sued for systemically breaching anti-money laundering rules. A separate probe into culture and governance at the bank concluded there was a “widespread sense of complacency” from the top down that blinded the lender to risks. The government, which had spent months insisting a wide-ranging probe wasn’t necessary, finally bowed to pressure and called the Royal Commission inquiry in November.

2. What is the Royal Commission investigating?

It’s looking at instances of outright misconduct or behavior that falls “below community standards and expectations” across the whole financial services industry. So far it’s heard customer case studies in consumer lending, financial advice, small business lending, issues affecting indigenous Australians as well as insurance and pensions. A final round of hearings focusing on policy questions is slated for November.

3. What’s been unearthed so far?

Lots. The public sessions that began March 13 have heard evidence of tellers at National Australia Bank accepting cash bribes to facilitate mortgages based on false documentation; Commonwealth Bank charging long-dead customers fees for financial advice; Westpac financial planners giving such bad advice that a nurse lost her family home; and wealth manager AMP Ltd. deliberately misleading the Australian Securities & Investments Commission. In its interim report released Sept. 28, the inquiry asked why such conduct had taken place. “Too often, the answer seems to be greed,” it concluded.

4. What’s been the fallout?

There’s already been change, as the industry acts to get ahead of a potentially tougher regulatory regime. Most of the banks are exiting wealth and financial advice businesses, where more of the problems occurred. They have also tightened mortgage lending criteria and cut fees and commissions. Heads have rolled, with the chief executive officer and chairman of AMP resigning and bonuses at other banks cut. Additionally, the government has announced tough new penalties for corporate wrongdoing and beefed up the regulator’s powers.

5. So what’s the outlook for the banks?

It’s getting bleaker. In addition to the likelihood of tighter regulation, fines and more court cases, the operating outlook is getting tougher. Most of the banks are trying to simplify their operations and sell non-core operations as a falling housing market, rising costs and increased competition put profits under pressure. In August, Commonwealth Bank reported its first annual profit drop in nine years. In the words of ANZ Bank Chief Executive Officer Shayne Elliott, a “golden period” for the industry is now over. Nonetheless, shares of the large banks rallied after the report’s release, partly on relief it stopped short of recommending penalties or tougher regulations. The big four and AMP make up almost a quarter of the stock market, so there are limited alternatives for local equity investors. And even with these travails, Australia’s banks remain among the world’s most profitable.

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