Turnbull, Kelly O’Dwyer and Morrison started to put contingency plans in place. Investors were getting jittery. The same day Turnbull spoke to O’Brien, the bank chairs met. They decided they needed to get Turnbull to call a royal commission immediately so that the government could set the terms of reference, rather than leaving it to O’Sullivan, whose terms of reference would be much more wide ranging.
Morrison and O’Dwyer pulled out all stops to get O’Sullivan and O’Brien to change their minds. A 9.30 am meeting for Wednesday 29 November was organised, at which O’Dwyer spoke to O’Sullivan. He refused to budge. Thirty minutes later, at 10 am, when O’Brien walked into Morrison’s office, he sensed an air of resignation in the room and assumed that Turnbull had told Morrison he wasn’t going to change his position. ‘By that time,’ O’Brien says, ‘I believe the letter from the banks calling for a royal commission was already in train.’
Morrison rattled off the various risks associated with a royal commission to O’Brien and asked him what he thought it would achieve. O’Brien was aware of the profound impact of the Fitzgerald Inquiry into police misconduct in Queensland, which had resulted in the premier being deposed and the jailing of three former Cabinet ministers, a police commissioner and corrupt police. He told Morrison that ‘there needed to be a cultural change in the sector and a royal commission was the most powerful way to affect a real cultural change’. The meeting ended with a handshake.
That afternoon, the CEOs and chairs of the big four banks sent a joint letter to Morrison, which they indicated would go to the ASX the next morning. It said: ‘In light of the latest wave of speculation about a parliamentary commission of inquiry into the banking and finance sector, we believe it is now imperative for the Australian Government to act decisively to deliver certainty to Australia’s financial services sector, our customers and the community.’ Despite the banks having consistently argued against a royal commission, the letter went on to say it was now in the national interest for the political uncertainty to end: ‘It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong. In our view, a properly constituted inquiry must have several significant characteristics. It should be led by an eminent and respected ex-judicial officer. Its terms of reference should be thoughtfully drafted and free of political influence. Its scope should be sufficient to cover the community’s core concerns which include banking, insurance, superannuation and non-ADI [authorised deposit-taking institutions] finance providers. Further to avoid confusion and inconsistency, the inquiry must to the most practical extent replace other ongoing inquiries.’8
An emergency meeting of the government’s Cabinet was called for 8.30 am to sign off on the royal commission and its terms of reference.
*
At 8.31 am on 30 November, NAB’s chief executive, Andrew Thorburn, called Wacka to tell him the news. Wacka and Thorburn had met many times over the previous few years and had built up a respect for each other. When Wacka got off the phone, he called me. Though I’d known it was only a matter of time before a royal commission took place, I hadn’t anticipated it would be at the behest of the banks.
At 9 am Turnbull and Morrison appeared in the Prime Minister’s Courtyard for a press conference. Both men were wearing dark suits, white shirts and matching blue ties. They were also wearing similarly pained expressions. Through the large open double doors behind them was an eye-catching heavily decorated Christmas tree, its lights flickering on and off. But there was little Christmas cheer as the Prime Minister, standing impassively next to Morrison, declared that a royal commission was ‘regrettable but necessary’. ‘This will not be an open-ended commission, it will not put capitalism on trial, as some people in the parliament prefer,’ Turnbull said.9
In lock step, Morrison said the royal commission was ‘regrettable but necessary to take control given the uncertainty, disruption and damage caused by the political events’. It was hard for Morrison to spin it any other way given he had voted against a royal commission twenty-six times.
The government stipulated that the royal commission would have a budget of $75 million, would be headed by one commissioner and would be completed within twelve months. It would also include an investigation of union-backed industry funds. It would not, however, have the power to award compensation to individuals or be allowed to cover matters that might prejudice, compromise or duplicate other inquiries or criminal or civil proceedings – which ruled out a lot of areas of questionable activity, including bank bill swap rates, the allegations raised by Dr Koh in his legal case against CBA, and the AUSTRAC scandal.
The announcement was a huge political backdown for Turnbull and a major blow to his leadership. He looked weak and indecisive. His backflip had just guaranteed the party and himself another negative monthly Newspoll, and he would later have to concede that it was a ‘political mistake’ not to have called a royal commission sooner.10
O’Sullivan, the man who had led the revolt, was jubilant: ‘It’s a great win for millions of Australians who are now going to see a serious inquiry looking into the culture of banking.’ Christensen agreed, saying, ‘I’m hoping that this is going to be a thorough root-and-branch review of the banking sector, it’s going to weed out these systemic cases of misconduct, and perhaps criminal actions by big banks, and we’ll get some justice for the victims of banking misconduct.’11
After Turnbull and Morrison’s press conference, I called Jeff Morris, whose phone had been running hot. He was overjoyed that a royal commission had been called but worried that it might be a whitewash. ‘The turgid and dishonest conduct of the banks will take many years to uncover fully,’ he said. ‘One year is too short. Does it mean the banks have written the terms of reference too?’ Opposition leader Bill Shorten made the withering comment: ‘Only when the four big banks give a permission slip for Mr Turnbull does he give in and hold a banking royal commission.’12
Regardless of the compromises, the people of Australia had been heard and a royal commission had finally been called.
Part Two
A blast of sunlight
The royal commission names and shames
Chapter 16
Round 1: Consumer lending
The mortgage-broking rort
ON 14 DECEMBER 2017 Kenneth Madison Hayne AC, a former High Court judge, was appointed as the commissioner for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Hayne made it abundantly clear from the start that he had been given a strict timetable of twelve months to examine documents and listen to testimony before delivering a final report with recommendations on 1 February 2019.
There was nothing about Hayne’s legalistic, black-letter approach and his conservative leanings that would have challenged the banks’ expectation that they could ‘manage’ the commission. After all, they had asked for the inquiry and Turnbull had handpicked Hayne; some bankers even foolishly hoped Hayne would be sympathetic, given his father had been a banker.
With infinite resources – and a matching dose of hubris – the banks were confident they would be able to outwit Hayne by starving the proceedings of documents, supplying superficial submissions, requesting confidentiality on documents and, if all else failed, presenting voluminous quantities they thought would swamp the resources of the commission.
*
On 15 December 2017, Hayne wrote to sixty-one financial institutions, regulators and industry associations, asking them to describe any misconduct they had become aware of over the preceding decade and say what steps had been taken to fix the problems. The institutions were given six weeks to file their responses. But Hayne felt the replies weren’t comprehensive enough, so on 2 February 2018 he wrote to a number of the institutions asking for more detailed responses. It was a request that let the industry and regulators know that he meant bu
siness.
ANZ CEO Shayne Elliott went on the front foot with ANZ’s list, writing an accompanying two-thousand-word heartfelt reflection on the need for a royal commission, conceding that ANZ’s submission ‘shows we’ve had some significant failures over the last decade’. His letter gave off a sense of foreboding that misconduct previously unknown to the public would surface. ‘It would be easy to lay the blame on a few bad apples or to say that these are largely historical technical glitches resulting from large complex IT systems. That would be wrong.’1
Elliott added: ‘For me, it’s completely unacceptable that we have caused some of our customers financial harm and emotional stress.’
He also noted: ‘It’s often cited that not one bank depositor lost money during the GFC, but as [David Murray’s 2014] Financial System Inquiry found we know more than 80,000 Australians lost billions of dollars as a result of the collapse of managed investment schemes, poor financial planning advice and other misconduct.’
It was one of the few times the boss of a bank would publicly acknowledge what had happened in a sincere manner, before and during the royal commission.
Westpac showed either ineptitude or disrespect when it submitted its misconduct list then had to quickly amend it a few days later after realising it had failed to include some crucial episodes. Hayne noted his displeasure, later writing, ‘This course of events points towards a disjointed, piecemeal approach to monitoring compliance with applicable laws.’2
CBA and NAB complained to the commission that the task of compiling a list of misconduct was too large and too complex and the deadline too tight.
Hayne treated their excuses with contempt. ‘Taken together, the course of events and the explanations proffered can lead only to the conclusion that neither CBA nor NAB could readily identify how or to what extent [they] had been failing to comply with the law,’ he said. In other words, the banks didn’t have systems in place that could give senior executives and directors of the board an overall picture and timeline of the extent of misconduct or compliance failures. Instead, information was presented in a disjointed way which could be explained away as, in Hayne’s words, ‘a small number of people choosing to behave unethically’.
Hayne’s comments were a timely reminder of the shabby risk management systems in our biggest banks. All banks struggled to compile a thorough list of wrongdoing, due to disparate or old systems. Indeed, Rowena Orr, senior counsel assisting the inquiry, described CBA’s submission as ‘not in a form that made it possible to understand the type and the scale of the misconduct’.
In the week leading up to the first round of hearings, CBA’s freshly minted boss, Matt Comyn, who’d succeeded Ian Narev, announced that CBA would stop selling the much-criticised insurance automatically included with some credit cards and personal loans. It was a clever attempt to neutralise the impact of some shocking behaviour likely to be revealed during round one of the royal commission, which would examine misconduct in consumer lending, including home loans, car loans and consumer-credit loans. CBA’s personal-loan insurance was the same junk insurance that had run afoul of ASIC, resulting in a multi-million-dollar fine on the same day Narev had announced his resignation. It was the very product Comyn would tell the royal commission months later had been raised with Narev as being problematic and opaque at a meeting on 28 May 2015.
*
Among the people there to watch the first day’s hearings at the Owen Dixon Commonwealth Law Courts building in Melbourne, on Tuesday, 13 March 2018, were spin doctors, lawyers, bankers and victims. After walking through security, many struggled to find free seats. The journalists meanwhile headed downstairs to a dank media room in the basement to watch two large screens, one showing extracts of documents and subtitles for the hearing-impaired, and the other showing a live stream of the commission itself.
From the moment Commissioner Hayne walked into the crowded hearing room, bowed to all in attendance, and sat down in a big leather chair, with the witness box to his right, the royal commission became compulsive – and for me addictive – viewing. Hayne made it clear he was not a man to trifle with. His long, jagged face and dour demeanour conveyed that he didn’t suffer fools. He warned financial institutions and witnesses that they needed to follow his instructions to the letter. If a deadline to supply documents was missed, they would be shamed. If a question wasn’t answered, it would be repeated until it was. He would be running a tight ship and woe betide anyone who didn’t fall into line.
He also laid out the topics to be dealt with by the royal commission and said they would be divided into seven rounds of two-week hearings over sixty-eight days. The first round would cover consumer lending, the second would be about financial advice, the third would deal with loans to small and medium enterprises, the fourth would examine people’s experiences with financial services entities in regional and remote communities, the fifth would be about superannuation, the sixth would be about insurance, and the final round would call the CEOs and examine the causes of misconduct in the financial sector and possible regulatory reform.
Counsel assisting the royal commission included the formidable QCs Rowena Orr and Michael Hodge, along with barristers Albert Dinelli, Eloise Dias, Mark Costello, Claire Schneider, Mark Hosking, Sarah Zeleznikow and Tim Farhall, and a team of lawyers from the Australian Government Solicitor’s office led by Simon Daley and Simon Sherwood.
The royal commission would use the latest computer software to identify particular phrases or combinations of words, and then search through the mountains of evidence for related material that might prove invaluable to the investigation. Between the software and the battalion of lawyers, the mission was to piece together documents and emails from various departments of the banks to find misconduct, patterns of behaviour and inconsistencies. When witnesses took the stand, their well-rehearsed excuses would be seen for what they were.
*
Round one got underway with its examination of consumer lending. Home lending is the backbone of banking, representing 60 per cent of banks’ overall loan books. It is also where most banks’ profits are made and where many abuses had occurred, particularly the selling of home loans to customers who couldn’t afford them. Irresponsible lending has played a massive role in the property bubble in Australian cities and in the country’s addiction to debt, putting our economy in a precarious situation should there be a sudden downturn when the time comes for interest rates to rise. We may still be sitting on a ticking time bomb, thanks to profligate lending by the banks.
In March 2017, APRA had imposed restrictions on lenders limiting new interest-only lending to 30 per cent of home loans written. A month later, the Reserve Bank’s April 2017 Financial Stability Review warned that the rising threats to Australia’s financial stability included a surge in interest-only loans and a rise in household debt. It said that if the property bubble burst or interest rates rose, the fallout could be catastrophic because one-third of borrowers – generally borrowers who’d recently signed up for a loan or were on low incomes – had ‘either no accrued buffer or a buffer of less than one month’s repayments’.3 If anything went wrong, these borrowers would be in serious trouble. The practice of quick twenty-four-hour approval for a home loan has come at a cost. So too has the relentless pressure from investors for banks to keep breaking record profits. It created a situation where banks increasingly relied on not just their own staff to sell loans but the growing army of mortgage brokers whose business model was based on getting a commission each time they sold a home loan. In her opening remarks at the royal commission, Rowena Orr commented on the power of the mortgage-broking industry, citing figures from the Mortgage and Finance Association of Australia showing that mortgage brokers were responsible for 55.7 per cent of all residential home loans. In the September quarter of 2017 mortgage brokers had settled $52 billion of all residential home loans, and across the whole of 2017 NAB had approved more than 89,000 home loans submitted by brokers, resulting in total lending of $
30 billion. Forty-one per cent of CBA’s home loan portfolio was offered through mortgage brokers; for ANZ the figure was 58 per cent.
The way mortgage broking works is that brokers tie themselves to mortgage aggregators who have a list of home-loan products and banks to choose from. Each bank pays the aggregator an upfront commission and a trailing commission, which is then passed on to the broker when a loan is written. This business model leaves the banks open to misconduct and home loan fraud, as some mortgage brokers are tempted to put clients into loans bigger than they can afford in order to earn a larger commission. As we have seen, in some cases, they have fraudulently signed loan documents to make a sale. In September and October 2017 UBS banking analyst Jonathan Mott headed a series of investigations that examined so-called ‘liar loans’ – cases where borrowers or their brokers overstated their repayment capacity in order to obtain bigger loans. Mott estimated that $500 billion worth of ‘liar loans’ had been issued – equivalent to almost one-third of mortgages in the system.4
What the royal commission subsequently revealed about mortgage broking was horrifying. For example, the country’s biggest mortgage broker, Aussie Home Loans, owned by CBA, was grilled over its handling of fraudulent brokers. In one case, the royal commission was told, broker Shiv Sahay was sacked after Aussie was alerted to fraud, but his customers were never informed as to why he was no longer representing them. Nor did Aussie tell the banks whose loans it brokered, because to do so would have stopped it collecting his trailing commission. It also decided against notifying ASIC.
Banking Bad Page 19
