When Freedom’s chief operating officer, Craig Orton, appeared in the witness box on 11–12 September, he repeatedly stated that he’d only recently joined Freedom, while acknowledging that the behaviour was scandalous. At one stage, he said Freedom ‘is a bit of a young company’ and on a ‘journey’. It was so much worse than that.
The royal commission heard that Freedom had received 37,584 calls to cancel policies in about twelve months. Three-quarters of the calls came from customers who said they either couldn’t afford the cover or didn’t want it. Of those, only 8118 calls (21.59 per cent) resulted in a cancelled policy.
‘Why does Freedom make it so difficult for customers to cancel their policies?’ Orr asked Orton.
‘The key problem I heard was not taking “no” for an answer on certain calls,’ Orton replied.
On the eve of Orton’s appearance, Freedom had made a clearly rushed decision and flagged to the royal commission that it would cease selling accidental death, accidental injury, trauma and life insurance over the phone, which represented 15 per cent of its business; it also announced it would stop offering staff non-monetary incentives such as holidays. However, its main business of selling funeral insurance and loan protection insurance via telephone calls would continue.
When Freedom was asked to hand over any documentation relating to how it came to such momentous decisions, it couldn’t – which was an indication of how quickly the decision had been made. Orton told Orr that Freedom sales agents felt they could make such a decision ‘without creating unnecessary paperwork’. I was sitting in the media room and all the journalists laughed aloud at this explanation. In light of the antics that go on in the life insurance sector, it was definitely a case of gallows humour.
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Round six of the commission had revealed rampant misconduct across the insurance industry. But one serious issue it didn’t have time to tackle was the management of insurance by superannuation funds. About 12 million Australians are passively funnelled into life insurance through their superannuation policies (so-called group insurance), paying a total of $9 billion a year in premiums. Many don’t even know that their super fund is deducting these premiums.
Insurance included with a superannuation policy usually provides a death benefit and a lump-sum payment in the case of total and permanent disability (TPD); it may also offer income protection insurance. The policies and the insurer are chosen by the super fund’s trustees. As a rule, retail fund trustees, such as those with the big four banks and AMP, recommend their own life insurers.
In 2017, an investigation I worked on with my colleague Ruth Williams revealed that life insurers had been quietly amending aspects of their insurance policies to include additional exclusions and tighter definitions. For example, instead of accepting the standard definition of TPD – that the person can no longer do the work they did previously – some insurers had adopted more stringent conditions requiring claimants to prove that they could not accomplish at least two or three basic tasks, such as showering, dressing, eating, toileting or walking without assistance. Our investigation showed that some, but not all, super fund trustees had accepted these exclusions and restrictive definitions without informing their members, partly to keep a lid on rising costs and premiums.
The revelations prompted one of the country’s leading life insurance lawyers, John Berrill, to describe some of the policies trustees had accepted as ‘junk insurance’ due to the ‘hidden nasties’ buried in them. In other words, such policies are making it almost impossible for policyholders to make successful claims, even where they are genuinely unable to work. Of course, the more claims that are rejected, the bigger the profit for the insurer. Given the number of Australians potentially affected by these sly moves, it was disappointing that the royal commission hadn’t made more effort to step in and protect them.
Chapter 22
The interim report
A taste of things to come?
ANTICIPATION GREW DAILY IN late September in the lead-up to the release of Commissioner Kenneth Hayne’s interim report. Under the royal commission’s terms of reference Hayne was required to produce this document to indicate his line of thinking. It was also designed to pose the questions ‘Why?’ and ‘What now?’, with a view to provoking informed debate in preparation for the last round of hearings and the final report.
Speculation was rife that the interim report would make referrals for criminal breaches, recommend changes to responsible lending laws, ban commissions and overhaul the mortgage-broking industry. There was even talk that Hayne might call for the dismantling of vertical integration to remove inherent conflicts of interest.
The AFL Grand Final was coming up on 29 September and it seemed unlikely Hayne would choose to release his report at that point, with footy fever dominating the news cycle. But on 28 September, as football fans and marching bands accompanied a cavalcade of Toyota Hiluxes carrying the West Coast Eagles and Collingwood teams in the annual AFL Grand Final Parade, word suddenly spread that the interim report was about to drop.
Three volumes totalling more than a thousand pages covered, in gory detail, the first four rounds of hearings into what had gone on in our banking system. In his opening paragraphs, Hayne explained why he thought the systemic misconduct had happened. ‘Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty,’ he wrote. ‘How else is charging continuing advice fees to the dead to be explained?’
His executive summary noted: ‘Too often, selling products and services became the sole focus of attention . . . Products and services multiplied. Banks searched for their “share of the customer’s wallet”. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.’
Hayne’s report blamed poor culture and lax compliance on the failure of institutions to mete out meaningful punishment when wrongdoers were caught. But his biggest rebuke was aimed at the regulators, largely ASIC, which had failed to do its job and enforce the law. ‘ASIC, rarely went to court to seek public denunciation of and punishment for misconduct,’ he said. ‘The prudential regulator, APRA, never went to court.’ He emphasised the importance of going to court in order to set a binding precedent in law.
ASIC was excoriated for doing little beyond extracting apologies, slowly. Usually that entailed ‘a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable “concerns” about the entity’s conduct’. More specifically, Hayne criticised ASIC for its handling of contraventions of the law, which he noted were commonly resolved by agreement. He advised that when contraventions of the law occurred, ASIC’s starting point should be to first ask whether it can make a case and, if so, ‘why it would not be in the public interest to bring proceedings to penalise the breach’.
He stopped short of criticising the law, believing it was more a case of the regulators not applying the powers they had. ‘Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach remedied,’ he wrote. How else could ASIC explain the infringement notices issued to the major banks over the decade to 30 June 2018, which totalled less than $1.3 million. To drive home this point, Hayne outlined two cases relating to infringement notices. In one, CBA had been fined a mere $180,000 over breaches of responsible lending obligations that continued for four years and affected more than 11,000 customers, who were entitled to remediation. In the other case, ANZ had paid just $212,500 for failing to make ‘reasonable inquiries about the credit limit a customer requires when it sent out offers to customers for overdrafts’. In both cases, the ASIC media release included the disclaimer that ‘the payment of an infringement notice is not an admission of guilt in respect of the alleged contravention’. In conclusio
n, Hayne said that if penalties were intended to have a deterrent effect ‘then it must be plainly said that the amounts imposed in these cases do not’.
On the issue of remediation, Hayne again blamed ASIC, this time for taking too long to negotiate outcomes. ‘There have been too many cases where remediation programs have taken months, even years, to formulate and implement,’ he said.
Hayne acknowledged that a lack of competition in financial services didn’t help. Competition in the banking sector was weak, barriers to entry were high and to participate in the economy and everyday life, Australians needed a bank account. ‘But they are reluctant to change banks,’ he said. He didn’t elaborate, but it was easy to understand what he meant. Despite all the scandals, there had been little switching from the big four banks, partly because customers think all banks are as bad as each other and partly because Australians tend to sign up to bundles of products, which makes it difficult to move a mortgage, credit card, savings account or insurance policy somewhere else.
Overall, though, bank misconduct was largely the result of greed, plain and simple. ‘There being little competitive pressure, pursuit of profit has trumped consideration of how the profit is made. The banks have gone to the edge of what is permitted, and too often beyond that limit, in pursuit of profit.’ Hayne found that such conduct occurred in all the major financial institutions, which suggested it wasn’t just ‘a few bad apples’, as the banks so often claimed in their defence.
In addition to these observations, Hayne posed more than six hundred questions and asked businesses to act honestly and fairly and obey the law. He also requested that the regulators do their job. But he stopped short of making recommendations or referrals for criminal or civil breaches. Such judgements would be saved for the final report, due in February 2019.
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The financial institutions had been given a stay of execution. Within hours of the report’s release, the banks and regulators had their statements ready, which included pledging immediate improvement in their behaviour. The Australian Banking Association’s chief executive, Anna Bligh, said at a speedily organised media conference: ‘Having lost the trust of the Australian people, we must now do whatever it takes to earn that trust back. To move from a selling culture to a service culture, there is much more work to be done in every bank. But every bank is determined to find the problems, to fix them and to pay back every penny.’1
ASIC’s chairman, James Shipton, issued a media statement acknowledging Hayne’s ‘serious and important observations of ASIC’s role as a regulator’ and promising to ‘carefully consider’ the criticisms in a full submission due within a month.2 APRA’s chairman, Wayne Byres, took some time to respond; when he did, he said ‘the royal commission has suggested, among other things, that regulators can and should do more to actively enforce standards of behaviour within the financial sector, and punish those who breach them. Based on what has been revealed, that is a quite reasonable conclusion.’3
Former AMP chair Catherine Brenner issued a statement saying she was ‘pleased that the royal commission’s interim report has made no finding against her of any personal wrongdoing in relation to AMP’s “fees for no service” practices’ and that she remained confident that further investigations would completely clear her of any misconduct. In his report, Hayne had been scathing of AMP, saying that ‘there were senior persons within AMP (I make no finding more precisely than that) who knew of the charging of fees for no service’, that AMP had ‘provided ASIC with information that was false or misleading’, and that ‘senior management and executives who contributed to the misleading of ASIC over a two-year period had knowledge of the true extent and nature of the conduct, and, in at least some cases, were warned by junior staff about it being a breach, but continued with a misleading narrative to ASIC’. He said these matters were now being followed up by the regulator. ‘I need not consider whether it is appropriate to refer the matters to ASIC for consideration. Having not heard evidence from Ms Brenner . . . or from any partner of Clayton Utz, I make no findings about their conduct.’
On the first day of trading after the release of the interim report, the share prices of the banks and AMP rallied 3 per cent. Among the whistleblowers and victims who had waited years for a royal commission, the feeling was that Hayne had so far failed to take action that would really mollify them.
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In the following weeks, Hayne’s musings were pored over by financial institutions looking for hints as to what he might recommend in his final report. For instance, his comments on conflicted remuneration and mortgage broking created an expectation that he would ban grandfathered commissions, restructure mortgage broking and kill off vertical integration.
After reading his comments about greed and incentives, I was confident he would do something radical to tackle the banks’ profits-at-all-costs culture. ‘Why do staff (whether customer-facing or not) need incentives to do their job unless the incentive is directed towards maximising revenue and profit?’ Hayne asked. ‘Experience (too often, hard and bitter experience) shows that conflicts cannot be “managed” by saying, “Be good. Do the right thing.” People rapidly persuade themselves that what suits them is what is right. And people can and will do that even when doing so harms the person for whom they are acting.’
Hayne asked whether structural change was necessary. ‘Should an intermediary be permitted to recommend to a consumer, provide personal financial advice to a consumer or sell to a consumer any financial product manufactured by an entity (or a related party of the entity) of which the intermediary is an employee or authorised representative?’ In other words, should the inherently conflicted model of vertical integration be unwound? Many bank executives believed Hayne would bring this about.
Hayne’s questions about responsible lending – ‘What steps should a lender take to verify a borrower’s expenses? Do lenders need to go further than the National Consumer Credit Protection Act which only stipulates the contract is “not unsuitable” for the consumer?’ – had created a widespread fear among the banks that he might call for a crackdown on the way banks assess the suitability of borrowers for loans.
Debates raged and speculation mounted, but for now everyone had to be content with the inconclusive interim report. In the meantime, we prepared for what promised to be a fascinating and momentous final round of hearings: a showdown with the chief executives of the major banks.
Chapter 23
Round 7: CBA
‘Temper your sense of justice’
ON 19 NOVEMBER, THE courtroom in Sydney’s Lionel Bowen building was buzzing with excitement as Commissioner Kenneth Hayne walked in briskly, bowed, sat down and nodded to Rowena Orr to open the seventh and final round of the royal commission. This round would delve into the causes of misconduct by financial institutions, and a succession of chief executives would have to leave the comfort of their opulent offices to front up to ‘one of the most consequential royal commissions ever conducted in Australia’.1
Before round seven had even begun, at least seventeen executives and directors of financial institutions had lost their jobs, or retired early, as a direct result of the royal commission. One remained on stress leave. Wealth divisions of banks and other institutions had been put up for sale, and Freedom Insurance was in turmoil, losing its chief executive and chair, and facing liquidity issues.
First up was CBA boss Matt Comyn, followed by CBA chair Catherine ‘the great’ Livingstone – ‘the great’ being her sobriquet until her performance at the royal commission eroded some of that reputation – who had managed to survive the 2017 AUSTRAC scandal, thanks to the main focus then being on former CEO Ian Narev. Others to appear included NAB boss Andrew Thorburn and NAB chairman Dr Ken Henry, a former Treasury secretary, as well as ANZ’s Shayne Elliott and Westpac’s Brian Hartzer. Due to the tight two-week time frame, the chairs of Westpac and ANZ weren’t called to take the stand.
It was a nerve-wracking affair to front up to Hayne,
perched on his elevated podium, jotting the odd note as he prepared for the financial institutions’ day of reckoning, his final report. As at other rounds, there to observe were whistleblowers, victims and media. Jeff Morris sat in the front row, wearing a bow tie. Others had rocked up in black t-shirts bearing the slogan ‘Bank reform NOW!’. The victims included Craig Caulfield, who had formed a support group called the Bank Warriors, as well as others who hoped for five minutes with Matt Comyn to tell him their stories. As Merilyn Swan rushed to the courtroom she almost collided with Comyn and his entourage of lawyers and staff. She took the opportunity to introduce herself, telling a nervous Comyn, ‘My parents, Robyn and Merv Blanch, were victims of CBA’s financial planner Dodgy Don Nguyen, and are one of the reasons you are here to attend this royal commission hearing today.’
Fittingly attired in black, Rowena Orr QC opened proceedings. She made it clear this final round would be different from the other six. This round was to help clarify whether bank culture, remuneration structures, regulators and the laws dealing with financial institutions needed to change. It would also examine whether there were barriers or obstructions that were preventing financial services companies and regulators from improving their own practices – and, if so, how could they be removed.
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