Banking Bad

by Adele Ferguson

  *

  Ralph Norris succeeded Murray as chief executive at CBA in 2005. Like Murray, Norris was a ‘true believer’ in the Cohen Brown sales model, and wasted no time in what he described as ‘reinvigorating’ it.

  The New Zealand-born Norris had been the managing director and CEO of CBA’s New Zealand subsidiary ASB Bank from 1991 to 2001, during which time the company had expanded its footprint across New Zealand and grown ‘its profitability six-fold and increased market share by 60 per cent’.12 Norris attributed part of his success to the Cohen Brown model, which he introduced to the bank in 1994. He liked to point out that ASB’s level of cross-selling was more than double CBA’s.

  One of his first moves as CEO of CBA was to hire Cohen Brown to review service levels and sales. ‘We are not achieving the customer service levels that we had anticipated,’ he told the media and investors in his first month after taking the top job. ‘I’m taking that very seriously.’ In other words, not enough products were being cross-sold to customers, largely because staff hadn’t fully embraced Cohen Brown.

  When releasing a record half-year profit in February 2006, Norris again spoke about Cohen Brown, telling analysts and the media that the Cohen Brown mantra was ‘not so much about sales targets [but] about actually being able to satisfactorily meet the needs of our customers through stronger needs analysis’. He noted that CBA’s share of business lending had fallen by one-third in the previous decade, due to an inability to ‘initiate customer leads’, along with some other issues relating to the centralisation of loan approvals. To change that, everyone at CBA needed to embrace the Cohen Brown method. When Norris released a new blueprint for CBA on 31 March 2006, he claimed the changes would deliver profitable market-share growth, productivity improvements and higher dividends.

  As NAB and CBA further absorbed the Cohen Brown mindset, they adopted its concept of ‘Onebankism’, which aimed to break down traditional silos within banks. Under Onebankism, bank tellers and other bank employees were required to refer customers to other parts of the business, such as private banking, business banking, financial planning or life insurance. At CBA, the CEO and top executives were front and centre of this new approach and Cohen Brown reported that it ‘moved quickly down and out through the ranks, gathering energy and sweeping the entire organization into its reach’.13

  Bank staff had to attend meetings each morning and give a commitment to the group to achieve their targets. A ‘debrief’ meeting was held each afternoon. Some former CBA employees later reported that when staff didn’t achieve their targets they were belittled in front of colleagues. One bank employee says managers patrolled the work area like stormtroopers to make sure staff were pushing products to customers at every opportunity. Some bank staff felt the training was a form of brainwashing.

  By 2007, the feedback from CBA staff in Financial Services Union surveys was alarming. Only 15 per cent thought management had realistic expectations about targets. A massive 80 per cent didn’t believe they could reasonably expect to achieve their targets. When asked if their work-life balance suffered because of targets, 75 per cent either agreed or strongly agreed. The question ‘I don’t feel pressured to make inappropriate sales to try and meet my targets’ produced a result of 33 per cent disagreeing and 32 per cent strongly disagreeing, which was higher than the average across all banks. Even more worrying was the response to a question about whether ‘targets bring out the best in me’ – 83 per cent of respondents disagreed. Furthermore, 26 per cent of those surveyed admitted they were aware of inappropriate lending practices being undertaken to achieve targets.

  I first came across the impact of Cohen Brown in 2013 when I wrote a series of articles about the aggressive sales at CBA. The series triggered hundreds of responses from CBA staff. Many described it as a cult-like sales technique that placed staff under intolerable pressure and resulted in serious mistakes. One former employee who’d left CBA in the early 2000s recalled branch staff going home and leaving the strong room open because they were too engrossed in their end-of-day sales debrief meeting. ‘Tellers’ errors went through the roof,’ he said. ‘A quick and accurate balance of the cash at the end of the day was for years the standard tellers aspired to. Now it was about how many new business referrals you got and whether you got your target for the day, forget about balancing the cash; cash was left out at night, customers’ deposits were lost and nobody cared. It was all about the tellers getting referrals and meeting targets. Tellers who failed to reach their referral targets were managed out of the bank.’ Some CBA staff suffered nervous breakdowns and some started taking antidepressant medication.

  The Cohen Brown method featured so heavily in CBA’s strategy during Ralph Norris’s reign that I decided to contact the company’s co-founder and CEO, Marty Cohen, in late 2018. I wanted to talk to him about the Cohen Brown method, including a patent filed in 2006 titled, ‘Systems and methods for computerised interactive training’, which contains an example of a telephone script that physiologically conditions staff to respond in a certain way. The patent talks about supplying a positive tone and visualisation when the right answer is achieved and a negative tone and visualisation when the answer is wrong. ‘A positive tone is generated and/or a text acknowledgement appears, indicating that the correct phrase was identified by the trainee,’ the patent says. ‘Then a “negative tone” is played, and a graphic and/or text message is provided, indicating that the answer was incorrect.’ The user is scored ‘based in part on the number of errors and/or opportunities that the user identified and optionally on the user’s response to the question’.

  In an email exchange, Cohen told me he is no longer using this type of ‘methodology’, but he doesn’t think there is anything wrong with the practice of ‘negative reinforcement’. ‘Any director or choreographer in the performing arts clearly tells the performers when they have done it right or they have done it wrong,’ he said. ‘If people are not aware of their incorrect behaviours, etc, then they cannot possibly change them because they don’t know that the behaviours are indeed problematic.’

  Cohen believes the insurance and financial planning malfeasance that occurred at CBA had nothing to do with Cohen Brown. ‘The bottom line is that I stand by my comments to you that Cohen Brown had absolutely nothing to do with the egregious financial activities that occurred at CBA or any other bank in Australia,’ he said. ‘It is the duty of bankers to CREATE AWARENESS of opportunities. This has nothing to do with product pushing . . . instead it is simply about creating awareness.’

  Cohen asserts that his company has been ‘erroneously besmirched in the Australian press, where it was stated that we created “aggressive sales cultures”. We have never used the word “aggressive” in any of our literature or presentations because we absolutely do not believe in being aggressive with customers. We believe in helping customers and caring about customers by first understanding their needs before offering solutions.’

  Whatever the case, an aggressive sales culture and an army of financial planners and bank tellers who were pushed to cross-sell products created perfect conditions for conflicts of interest and misconduct to fester. As long as the sharemarket boomed, inappropriate advice went undetected. But during downturns, such as the dot com bust and the Global Financial Crisis (GFC), flawed business models and dodgy advice would be exposed.

  Chapter 5

  Giving with one hand . . .

  Misleading advice and margin calls

  ON 20 JANUARY 2009, Senator John ‘Wacka’ Williams swung his car into the Golden Ox restaurant in Margate, a north-eastern suburb of Brisbane. Five days earlier, CBA had put a financial advice company called Storm Financial, run by husband and wife team Emmanuel and Julie Cassimatis, into receivership to recover corporate debts of $10 million. It was a minuscule amount, given that CBA’s action would ultimately leave more than three thousand investors, mostly retirees, exposed to losses – and debts – of $3 billion. CBA had been the largest lender to the many
elderly clients who had signed up to the Storm Financial business model and without its backing Storm would never have grown to the size it did.

  Wacka had been asked to address a meeting of the victims of Storm Financial’s collapse by John McLennan, the former Westpac Bank executive turned whistleblower who’d helped Wacka when he was a victim of CBA’s foreign currency loan scandal a decade earlier. Tired and hot after driving six hours from his home in Inverell, Wacka thought back to meetings he’d attended twenty years earlier as a victim of the CBA foreign currency loan scandal.

  He braced himself for the worst before entering the restaurant. He’d missed dramatic scenes earlier in the day when the owner of the Golden Ox had called the police and an ambulance to come to the restaurant in an attempt to contain the highly stressed crowd of retirees.

  Inside the Golden Ox, Wacka was confronted by crowds of deeply distressed Storm Financial victims, some of the women hysterical and the men trying not to choke up. ‘There must have been about four hundred people who turned up to hear me talk,’ Wacka recalls. ‘These people were in their sixties and seventies and were facing eviction from their homes onto the streets after working hard all their lives.’

  Their worlds had been turned upside down the previous month when CBA, sweating over the GFC and having to digest the $2.1 billion acquisition of Bankwest it had made in October, told hundreds of Storm Financial clients who held margin loans that the bank had made a margin call and sold their holdings in Storm Index Funds. Some were told the value of their funds – in many cases, their entire life savings – had fallen so much they were now worth less than the debt they owed on them. Most didn’t understand what was going on.

  A margin loan allows an investor to borrow money for investments, using the purchased equities as security. Such products are not for the faint-hearted – although they can help investors increase their returns, they can also magnify their losses. For example, if the value of the equities drops significantly, the lender can make a margin call, which requires the borrower to put more money into the account to cover the loss. If clients can’t inject the extra cash, they are forced to sell some of their shares. Normally, a margin call occurs only when the value of the equities in the portfolio falls below a set amount, at which point, by law, the borrower must be notified and given the opportunity to top up the account. In the case of Storm, however, the margin call had happened as much as six weeks earlier – without the clients’ knowledge.

  ‘In layman’s terms, the banks simply sold these people’s portfolios down without prior warning, snuffing out their income streams and forcing many distressed investors to sell their family homes in order to meet their [loan] commitments to the bank,’ Wacka says. ‘Many Storm clients could easily have met their margin lending commitments if they’d been given the basic courtesy of a phone call to alert them that they needed to top up their account. If margin calls had been made in a professional and orderly manner, most of these investors would be watching their portfolios performing strongly today (given the market’s rally since then) rather than staring at financial ruin.’

  Wacka told the meeting that probably the best he could do was arrange a Senate inquiry into what had gone wrong and how it could be fixed.

  *

  Wacka’s fight with CBA had been one of the worst periods in his life and destroyed his marriage. But he was never going to stay down long: he had set up his own business selling nuts and bolts to farmers and met his soul mate, Nancy Capel, a journalist who owns independent newspaper The Bingara Advocate, based in northern NSW.

  In the years after his battle with CBA, Wacka had secretly dreamed about running for office but never had a chance to act on it. He’d joined the National Party in 1982 and increased his involvement in the party over the years. Then in April 2006, aged fifty-three, Wacka told Nancy he wanted to run for the Australian Senate. He entered Federal Parliament on 1 July 2008, during the GFC.

  Wacka had been a federal senator for only a few months when he fronted the Golden Ox meeting. One of the main reasons he’d become a politician was to help battlers and small businesses, just as Australian Democrats Senator Paul McLean had done two decades earlier. A few days after the Margate meeting, Wacka invited McLean, who was living in virtual seclusion in Tasmania, to Inverell to help him get his head around Storm.

  It soon became apparent that Storm had been built on a flawed business model and the banks, including CBA, Macquarie, Westpac and Bank of Queensland, were complicit in its collapse, as they had facilitated the loans and margin lending facilities. The investors had been encouraged by Storm Financial advisers to mortgage their homes or superannuation in order to generate a lump sum to invest in the sharemarket via Storm-badged Colonial First State managed funds and Storm-badged Challenger managed funds. Clients were then advised to take out margin loans to increase the size of their investment portfolios. This one-size-fits-all advice model based on getting new clients into debt or persuading existing ones to go even further into debt proved to be highly inappropriate for the retirees, who should never have been put into such risky products. Many lost everything and ended up owing a fortune.

  ‘If you had a million-dollar house and you owned it you could borrow half a million dollars from Colonial, then you might borrow another $2 million and invest it in Storm index funds, and the earnings off those shares or index funds would [theoretically] pay your interest on the loans, plus give you $50,000 a year to retire on,’ Wacka says. ‘And of course, Storm [and] Cassimatis got tens of thousands of dollars for every client they took on.’ Clients were charged a hefty upfront fee of 7 per cent of the total geared amount as well as trailing commissions – commissions that continued after the investments had been made. For the Cassimatis family, the fees helped build a lavish empire, including a private jet and a five-storey mansion with Waterford crystal chandeliers, lifts, swimming pools and panoramic views over Magnetic Island. Before the GFC hit, their estimated wealth was $450 million.

  The Cassimatises shared some of the spoils with Storm’s best clients. Annual cruises to exotic places became legendary and were subsidised by the banks and other sponsors. Investors were whisked off for two weeks to Europe, Alaska and Canada, or South Africa. The trips were designed to promote the success of the business and attract more investors. They also highlighted the close relationship with the big gorillas of the financial world, including CBA, whose representatives would often attend the events.

  While the market was rising, everything went well. When the sharemarket tanked, the strategy unravelled. As the value of Storm index-fund investments plunged below the equity level required to maintain the margin loans, CBA pounced, putting Storm into receivership and calling in the loans. Thousands of ordinary Australians were affected – including the many retirees persuaded by Storm to invest. They lost savings, businesses and homes – some of them were forced to live in tents, caravans, even pre-fabs beneath the elevated Queensland homes of their children. Some died early or committed suicide.

  The Financial Review’s Duncan Hughes later travelled to Townsville to cover the Storm Financial collapse and interviewed many victims, including Steve Reynolds, a Vietnam War veteran on a totally and permanently incapacitated annual pension of $30,000 per year. ‘Over a glass of beer in a backroom of the Townsville RSL Club, the father of two daughters explained how his home and income were geared to $1.2 million through a combination of a Bank of Queensland home loan and a Colonial margin loan,’ Hughes recalls. ‘The documents were prepared by Storm and he was told where to sign in a ten-minute signing session conducted at its nearby headquarters.’

  Like so many Storm victims, Reynolds had no financial experience and was hoping to provide some security for his children. He was sixty when he signed the deal in 2008; within six months, he had lost $420,000 in borrowed money and had to put up his home for sale. He moved to a hut in Bali in late 2016, after losing everything and finding it too expensive to live in Queensland.

  Phil Green, a fo
rty-seven-year-old public servant, married with two young children, earning $46,000 a year, ended up with debts of $1.8 million courtesy of CBA. The home loan application prepared by Storm failed to take into account the interest payable on his six-figure margin loan. Jack Dale, an air-worthiness controller and his wife, Frances, a school teacher, retired in 2002 in Cairns. In 2004 their financial planner moved to Storm and advised them to invest their super funds of $340,000 and apply for a $260,000 margin loan with CBA’s Colonial Mutual, bringing their total investment in Storm to $600,000. They were then advised to take out an additional loan on their family home. It was the first time they had invested in the sharemarket. By November 2007, their margin loan exposure was $1.8 million. At the age of seventy-two, they lost their home and were forced onto Centrelink payments. ‘We are on the edge of disaster if anything untoward, such as a health issue, should happen; if that were to come up we do not know how we would handle it,’ Jack Dale told a parliamentary hearing in September 2009.

  Misconduct, particularly in relation to valuations and risk management, was rampant across Storm and CBA. As was later revealed in an affidavit lodged with a parliamentary inquiry into Storm Financial, one former Storm employee who had worked in the Aitkenvale branch in Townsville claimed that a vacant suburban block in the outback township of Charters Towers in Queensland was revalued by CBA’s computerised property valuation system, VAS, in March 2008, at $350,000 – just eight months after another valuation had priced it at $50,000. The tiny Aitkenvale branch became CBA’s biggest home loan writer in the country, as staff overstated income and asset values to make customers eligible for bigger loans than they could afford. Some customers claimed documents had been forged so that they could be shifted to higher-risk investments.1