Finance Industry Under The Pump Ahead of Parliamentary Grilling

By Rodney Lester

Australia’s wealth and finance sectors will be put under the spotlight next week when the CEO’s of major institutions will start appearing before the house economics committee. These sessions, which are to become an annual occurrence, have been seen as an attempt by the Turnbull government to ward off the popular calls for a banking Royal Commission by Labor and others.

Although “aggressive” questioning is expected, one could be forgiven for thinking this process is just as much political theatre as opponents of a Royal Commission say that would be. There is an acknowledged “trust gap” between the banks and the public - will the sight of CEO’s possibly squirming under scrutiny do anything to change that? If it is an opportunity for the industry to outline what they are doing about this perception problem, is it anything more than an advertorial showcase put on by the government with some very expensive talent delivering the key messages?

TRUST IS AN ISSUE

A recent global study into banks by Ernst & Young has indicated a global lack of trust in banks, particularly when it comes to banks giving unbiased advice. In Australia, only 36% of the traditional banking sectors own clients said they had complete trust in their bank. Just over 50% trusted the banks to keep their money safe, but only 1 in 5 customers trusted the banks to give them unbiased advice and to put their (clients) interests first.

Call me naïve – but I find that astonishing. We are all aware that a business has to make a buck, but now 80% of a bank’s own customers expect that a bank is not primarily looking out for their best interests – but rather, trying to squeeze as much money from the client as possible.

This is now just what the vast majority of us expect from our banks!

That is some perception problem.

WHAT IS GOING ON?

Evidence would suggest it’s not just a perception thing. Fairfax reported that “Poor Behaviour” by major banks in recent years has seen more than $200 million in payouts and compensation go back the consumers in the last financial year. CBA, NAB and Macquarie have all instigated compensation schemes for their clients who have suffered from their “poor behaviour”. The government own MP, Warren Entsch has called it “Bank Bastardry” and it would be hard not to agree, given it does seem in many cases like systemic misconduct.

In a story in the Australian, new Reserve Bank Governor Phillip Lowe pointed out that banks have been shielding their shareholders from the costs incurred resulting from the GFC. Profits and return on equity could have been lowered, but that had not happened. Banks have held on to their profits by doing things such as keeping rates on credit cards high, keeping a larger spread on small business loan rates and not passing on the full reserve bank interest rate cuts. According to Lowe: “My assessment is that borrowers have largely borne the cost…not the shareholders of the banks, and it’s an interesting question about who should ultimately bear the cost”.

INDUSTRY TRYING HARDER

In lieu of the bad publicity it has received, the industry has taken steps to reassure the public it is recognising the error of its ways and is on the right track. Chief lobby group for the industry, the Australian Bankers Association said the banks had agreed to “New hiring protocols” for financial advisers to try to weed out “bad apples” during the hiring process. In efforts to remove what is seen as a negative “sales” culture, Westpac has announced that it will be removing all product related incentives from tellers, incentives will now be based solely on customer service.

Another who is saying the industry is getting back on the correct path is the chair of the house committee that will be grilling the banks. Liberal MP David Coleman, a former Director at Yellow Brick Road said ‘the government had already announced a range of reforms to improve the educational, training and ethical standards of financial advisors, in response to the Financial System Inquiry and other reports.’

So we don’t need a Royal Commission, and by the sounds of it, we don’t need this house committee session either.

WHAT NEXT

It’s true that consumers have been mal-treated by the industry. Compensation schemes attest to that fact. It is also true we have had many inquiries, reports and hearings on the problems within the industry, and steps have been taken to remedy the situation – funnily enough, the compensation schemes attest to that as well. We’ll have to wait and see what happens next week – will it be just a cathartic exercise in big bank bashing that satisfies critics, or an advertorial opportunity for the industry and government to show how on top of the industry’s problems they are. Or maybe something in between.

Ultimately, as is often the case, the judgement will be made by “old man time” – the proof will be in the pudding. If the scandals stop, it will be proof enough the industry has lifted its game, if they continue, more action may need to be taken. 

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