Banking Bad

by Adele Ferguson

  Nevertheless, Besley says Murray seemed startled when he told him, ‘The board wants you to be the chief executive.’ Murray replied, ‘It’s a bit early, isn’t it, for me?’, to which Besley responded, ‘It’s not. You’re it. You’re in the deep end.’ Besley thinks Murray was a great pick.

  Murray might have worked at the bank for years, but he behaved like an outsider. He wasn’t one for small talk, had a bone-dry economic outlook that included a belief that the economy was best served by small government, light-touch regulation, free-market banking and an emphasis on innovation and technology. ‘He is a great lateral thinker and doesn’t suffer fools gladly,’ Besley says.

  Besley and Murray made a formidable team. Besley was the polished and diplomatic chairman, while Murray, who’d grown up in country NSW, was blunt.

  The ‘people’s bank’ was fast becoming a relic. An institution from a bygone age.

  *

  Murray quickly set about restructuring operations and shedding staff to cut expenses. He justified this to the sharemarket by saying, ‘The Commonwealth Bank cannot stand alone with uneconomic services and/or high costs and continue to provide the community with the reliable service it has come to expect. Nor can it compete with a public-service mentality.’4

  Comments like this didn’t go unnoticed by the union or Presdee, who recalls, ‘[Murray] was ruthless and hardnosed and was determined to change the culture into a private bank piranha and establish shareholder value.’ Flat fees of $1.50 a month were slugged on passbook and Keycard savings accounts with balances below $250, and other fees were introduced. Murray moved the bank further and further into financial services, setting up a stockbroking arm, CommSec, and moving into funds management and insurance. The sky was the limit.

  Less than a year into his job as CEO, Murray told staff of plans to slash the 42,000-strong workforce. Technology was disrupting the way people did banking, and Murray wanted to encourage customers to make more use of automatic teller machines (ATMs) and EFTPOS. ‘It was a huge blow for everybody,’ Presdee recalls.

  The union wanted all redundancies to be voluntary, but CBA wouldn’t agree. ‘Everybody was nervous about their future, and they had every right to be,’ Presdee says, adding, ‘The relationship between the union and the bank became increasingly toxic, which is a shame. It was never like that before.’

  At the same time as their jobs were under threat, staff were increasingly pressured to sell new products. Peter Neale, who had worked at the bank as a loans manager since 1969 and had advised Wacka Williams on his foreign currency loan, recalls that after CBA’s privatisation the culture of the bank changed and staff ‘were pushed to sell, sell, sell’. ‘If a couple came in for a home loan we would have to see if we could get them to take out a credit card, a personal loan, insurance on the house, life insurance. It was tough,’ he added. As one example, Neale says he personally struggled to sell a $5000 credit card to a young couple who had just taken out an $80,000 loan. ‘I was happy to inform people, but I wasn’t prepared to write things into a loan that some wacko in head office was forcing us to do.’

  Having moved from Inverell in 1990, Neale was working out of a CBA branch in Goulburn, in rural NSW. After CBA’s privatisation, Neale recalls being given targets to meet each month. ‘They had shareholders to accommodate and they had to move products off the shelves and staff were pressured to do it. It was something ridiculous like having to sell 150 loans a month,’ he says. ‘I’d get a call from administration in Canberra asking why I hadn’t met my quota. I’d say, “Goulburn has a population of 24,000; if you subtract children from the number, and other things, you are left with an income source of 10,000 people and you have ANZ, Westpac, Advance Bank [which was later bought by St George then Westpac] all trying to write loans. How in God’s name can you expect us to meet that target? It’s impossible.”’ On 28 September 1994, Neale resigned, unable to agree with the bank’s policies.

  *

  Murray wasn’t the only one shaking things up. All the major banks recognised that having an extensive network of thousands of branches was a costly way of delivering services. In particular, it was no longer economical to retain branches in small country towns, where they often had to compete with other bank branches. But the closure of branches in small towns would become a massive, divisive and highly emotive issue, not just for communities but for the unions. People felt that the banks were mercilessly ripping the lifeblood out of their communities.

  There were protests and anger in small towns everywhere – towns such as Stanhope, west of Shepparton in Victoria, where locals held a rally after CBA flagged the closure of its branch. Jim Thompson, who was the manager of the shire of Bet Bet in central Victoria in 1994, called on the media to cover the impact of branch closures. He told The Age the closure of the Dunolly branch in December 1993 had a devastating impact on the town. ‘The nearest Commonwealth Bank is now at Maryborough, twenty-three kilometres away, and that makes it difficult for people without transport,’ he said. ‘The Commonwealth is supposed to be a people’s bank, a government bank, but it seems that these economic rationalist decisions are made in Sydney and Dunolly is irrelevant.’5

  By 1995 Murray had overseen the closure of more than 200 branches from about 1600 and cut staff to 35,000. To further reduce the power of CBOA, in 1996 he hired Les Cupper, who was well known for his success in busting the unions in the mining sector, to run the bank’s human resources department. During Cupper’s tenure he would offer non-union individual employment contracts to bank workers, a move that would make it easier to introduce new sales and targets.

  For many, Murray was an enigma wrapped in a riddle. He had spent two decades living and breathing the culture of the bank, yet when he rose to power he was able to flick a switch and radically change it. Presdee saw Murray’s behaviour as being motivated by a fear of failure. ‘I think Murray wasn’t going to be a failure, so he wanted to build a bank he thought would survive deregulation and technological advances.’

  The bank that the Fisher Labor government had created in 1911 as the ‘people’s bank’ was transformed into an institution where the raison d’être was making bigger and bigger profits at any cost. Between 1998 and 2000, CBA’s profit totalled $5.4 billion – more than half the total proceeds received by the Australian public through its partial privatisation.6

  Chapter 3

  A soft touch

  Resisting the regulators

  THE HILTON, BRISBANE. IT was November 1991, just a few months after the part privatisation of CBA, and Allan Fels, the chair of the competition watchdog, the Trade Practices Commission (TPC), stood before a room packed with journalists and photographers. Fels, known for his distinctive drawl and piercing eyes, had spent the morning on the phone ringing around media outlets – working up interest, promising a bombshell.

  Clutching his press release, a serious-looking Fels waited for silence before outing the institution in question as Colonial Mutual, one of the biggest and most respected life insurers in the country. Colonial Mutual, Fels alleged, had engaged in five years of deceptive and misleading conduct by targeting Aboriginal people and poorly educated Australians to sell dud insurance policies.

  ‘Unconscionable, misleading or deceptive conduct will not be tolerated,’ Fels thundered as the cameras rolled and journalists scribbled notes furiously.

  Fels said that experienced Colonial Mutual agents had sold policies to people who couldn’t afford them, promising them they would get their money back in two years and that the policy could buy a car or fund a Harvard University education for their children. In Fels’ view, the case highlighted the need for stronger protection of ‘less financially sophisticated’ consumers when they were buying life insurance and superannuation products. He also said he intended to institute proceedings against Colonial Mutual in the Federal Court.

  It was the first time a regulator had used the media so effectively to name and shame a big financial services firm, and it confirmed th
e fears of some of the business community about Fels, an economic rationalist and academic who’d been appointed to the role of TPC chairman in July 1991 and was also the head of the Prices Surveillance Authority. Big business had tried to derail his appointment; the peak business body, the Business Council of Australia, even wrote to Prime Minister Hawke urging him to pick someone else.

  Fels was seen as trouble within the business community and disliked for his use of the media to air his views – or scandals. He had gained a reputation at fifty as a ‘media tart’ after putting powerful oil companies, the book industry and the aviation industry into the headlines when he was chair of the Prices Surveillance Authority, a regulator that had been almost invisible before Fels came along.

  Fels’ revelations about Colonial Mutual would also mark a growing appetite among the media to cover bad behaviour by financial institutions. There had already been the foreign currency loans scandal and the Westpac Letters Affair. The Martin Inquiry into deregulation, which reported in the same month as Fels fronted the media, had also heard some gruesome misconduct stories. Now there was confirmation that it wasn’t just banks doing the wrong thing in the pursuit of profit and targets.

  Colonial Mutual’s life insurance scandal couldn’t have come at a worse time for the industry. Three months earlier, on 20 August 1991, the Labor government had introduced the compulsory superannuation guarantee charge, requiring employers to pay 3 per cent of each worker’s salary into a superannuation account from July 1992, with the employer contribution to rise to 9 per cent by 2002. It would democratise super which, until then, had been a product used mainly by the wealthy.

  It was also a decision that effectively placed Australia’s retirement savings into the hands of fund managers, most of which were owned by insurance companies, including Colonial, AMP and National Mutual. Life insurance companies played a major role in the provision of superannuation services, from managing employer-sponsored and industry-productivity funds through to the sale of personal superannuation. According to the TPC, $56 billion of the funds managed by life insurance companies related to superannuation contributions.

  For these companies, which were about to join the race for management of an estimated $600 billion of retirement savings by 2000, bad publicity like that sparked by the Colonial Mutual affair could result in unwanted scrutiny and more regulation, particularly if Fels was on the case.

  More to their liking was the appointment earlier in the year of Fels’ regulatory counterpart, Tony Hartnell, as the founding chairman of the new national corporate watchdog, the Australian Securities Commission (ASC), which was set up after it became apparent from a string of company collapses and bank scandals that the current regulatory system wasn’t working. In January 1991, the ASC replaced the NCSC and the patchwork of state agencies, which had been little more than a fig leaf for regulation.

  The new regulatory body promised to be far better resourced than its predecessor.

  Others, mainly those in favour of stronger regulation, felt Hartnell was too close to big business and was taking a softly-softly approach. Before becoming chairman of the ASC Hartnell had been a senior partner at Allen Allen & Hemsley – the law firm that had penned the infamous Westpac Letters. In contrast to Fels, Hartnell saw the role of the ASC as being ‘to establish a climate of compliance, ethics and responsibility’.1 The ASC had criminal and civil law available to it, but from his earliest interviews Hartnell made it clear his preference was to use civil action rather than criminal prosecutions to enforce compliance of corporations. Civil action required a lower burden of proof and was therefore quicker and more efficient, he said.2

  This frustrated the Commonwealth Director of Public Prosecutions (DPP), Michael Rozenes, whose job was to pursue criminal action in the courts. The tension between Hartnell and Rozenes culminated in an extraordinary public outburst in September 1992 at a parliamentary committee hearing when Rozenes claimed the ASC had one rule for the rich and another for the poor when it came to decisions about civil and criminal sanctions. It was a brutal attack that Hartnell denied. He defended his preference for civil proceedings in ‘appropriate cases’ and said there was no disagreement between him and the DPP over ‘serious’ fraud that merited criminal action.3 After Hartnell’s term expired in late 1992, he returned to Allen Allen & Hemsley, before starting a new law firm, Atanaskovic Hartnell, specialising in corporate and finance law.

  Fels had a different style. He was all about public statements and using fear tactics to keep companies in line. To obtain firsthand accounts of the life insurance scam, he had sent a team of TPC investigators to the outback for two months. The stories the investigators came back with were powerful – and appalling. Colonial targeted people in low socioeconomic areas and misled them into buying products they didn’t need and couldn’t afford. Aboriginal people on welfare payments, foreigners with limited English and people who had only primary-school education were all easy prey. The agents organised premiums to be automatically deducted from welfare payments and pensions to make sure they got their commissions.

  Some agents were flogging hundreds of policies a week and getting rich on the commissions. The more policies they sold, the more they earned. It was open season, as the laws governing superannuation and life insurance were flawed, leaving customers vulnerable to exploitation. There were no tribunals, for instance, where customers could lodge a complaint if things went wrong.

  The behaviour of the life insurance agents was so egregious that the Australian Government announced a full-blown inquiry into the sector in March 1992 and appointed Fels to chair it. In December 1992, the final report from the inquiry, Life Insurance and Superannuation, was released. It laid bare deep conflicts in the industry, showing that life insurance agents felt their primary responsibility was to the life insurance companies that employed them, not to the customers who bought their products. As a result, many products they recommended were not appropriate. Nevertheless, most customers believed the agents were acting in their best interests, not realising they were paid a commission for the products they sold.

  The report also found an alarming number of consumers were losing money on insurance products because of high fees and charges, hidden penalties and inadequate disclosure of information at the time of sale. It recommended that commissions should be disclosed to customers. It said insurance policies were generally complex and opaque, and their wording lacked consistency between companies, making it impossible for customers to compare products. Finally, the report noted that ‘insurers have not controlled the conduct of their agents or implemented steps to stop bad agents being recycled from company to company and that the market continued to deliver poor value for money to a high proportion of customers’.

  The insurance and superannuation industries rejected the report and its recommendations. Using the Life Insurance Federation of Australia conference, AMP’s chief executive, Ian Salmon, who was also a member of the Business Council of Australia, denounced the TPC as a ‘creature of the consumer movement’ and said its policies were ‘anti-business and anti-competition’. He concluded: ‘There seems to be no need for a watchdog that increasingly wants to bite everyone within reach.’

  Others in the sector tried to use fear to hose down Fels. Mercantile Mutual slammed the TPC report as ‘on balance, completely unnecessary’ adding, ‘If the TPC interferes too much in the mechanics of the industry they could damage one of the ways the country can generate long-term capital.’

  This would be a recurring theme throughout the decades. Indeed, it would take until 1 January 2018 – more than twenty-five years – before some of Fels’ recommendations, such as greater transparency in commissions, would be addressed.

  *

  It wasn’t just the life insurance sector that had learned to mobilise powerful lobby groups to delay or water down reforms. The banks had recently mastered this strategy too.

  When the Martin Inquiry had released its own report in 1991 – wittily titled ‘A Po
cket Full of Change: Banking Deregulation’ – it had called for a new code of practice to be developed for the banks, one that would be ‘contractually enforceable’ by bank customers and would be subject to ongoing monitoring by Fels’ TPC. It also recommended a banking ombudsman.

  Banking executives immediately went on the attack. The first to fire a pre-emptive strike was Don Argus, chairman of NAB and a representative of the high-profile banking lobby group the Australian Bankers’ Association (now the Australian Banking Association), who was nicknamed ‘Don’t Argue’ because of his forthright and forceful personality. On the eve of the release of the Martin Inquiry report, Argus used a speech at the Australian Bankers’ Association annual dinner in Canberra to claim the industry was being ‘suffocated’ by new regulation. He told the crowd of bankers and politicians that a new code and other possible legislative changes would cost hundreds of millions of dollars.

  ‘[A] free and competitive market contains the most powerful inbuilt mechanism for consumer protection,’ he railed, adding, ‘Loss of business is a powerful disincentive to shoddy behaviour.’ Besides, he argued, the sector couldn’t afford to comply with the code – it was facing headwinds from every direction. ‘There’s an imminent squeeze on bank revenues, margins and profits as a result of continued low inflation, a slow reduction in non-performing assets, the de-gearing of corporate balance sheets, and the diversion of savings from banks into superannuation,’ Argus said.4