Westpac trumps the majors as Hayne sets sights on NAB
Karen Middleton's summary from the lockup.
Commissioner favours bank prosecution under Corporations Act
By Karen Middleton
Three of the big four banks – all except Westpac – and a collection of other financial institutions could face civil and criminal prosecution for misconduct after royal commissioner Kenneth Hayne made 24 referrals to the regulators in his report published today.
Commissioner Hayne recommends the regulators consider prosecuting the institutions as part of a three-volume report into misconduct in the banking superannuation and financial services industry.
The commissioner makes 76 recommendations – all of which the federal government says it will take action on, with one caveat.
Treasurer Josh Frydenberg says the government is not, at this stage, implementing all of the recommended changes relating to mortgage brokers.
The Opposition says it accepts, in principle, all of the recommendations.
Among those, the government will establish a compensation scheme of last resort to ensure that victims of banking misconduct will receive recompense.
It has allocated A$30 million to cover payments to 278 people who have already received judgments in their favour but have not been paid by the institutions involved.
Commissioner Hayne does not recommend individual executives for prosecution but refers examples of alleged misconduct by institutions to the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.
It is possible charges against individuals could flow from the recommendations.
He recommends the regulators consider prosecutions against the institutions for misconduct under the Corporations Act, punishable by up to 10 years’ jail and financial penalties of more than A$90 million.
They include the National Australia Bank, the Commonwealth Bank and the ANZ, along with AMP and some other financial institutions. Westpac earns a reprimand for its behaviour but the commissioner stopped short of recommending it for further action.
Hayne also directs some stinging criticism at ASIC over the fees-for-no-service scandal.
The big four banks, plus AMP have already agreed to pay A$850 million between them in compensation for charging fees for no service.
The commissioner says ASIC and the companies approached the issue of their conduct as if all that was required was to repay what had been taken with some compensation for the clients not having had use of the money.
He says they treated the conduct “as if it was no more than a series of inadvertent slips, brought about by some want of care in record keeping”.
“It is necessary to keep steadily in mind that entities took money (a lot of money) from their customers for nothing,” he writes. He says dismissing it as carelessness must be challenged.
The Commissioner says some of the companies’ actions may constitute an offence under the Corporations Act of engaging in dishonest conduct.
He suggests there may be grounds for prosecution for a separate offence under the ASIC Act of accepting a payment for a service it was knowingly unable to supply in time.
But Commissioner Hayne says he favours prosecution under the Corporations Act and that he believes the maximum penalty most fits the gravity of the conduct described.
To avoid a repeat of fees being charged for no service in future, Hayne recommends the law be amended so clients must annually renew fee arrangements, that both the fees and the services they cover be recorded in writing and that fees cannot automatically be deducted from an a client’s account without their express written authority.
NAB in the spotlight
Commissioner Hayne singles out the National Australia Bank’s leaders – chief executive Andrew Thorburn and chairman Ken Henry - for personal criticism, accusing them of not taking their responsibilities seriously.
“I am not as confident as I would wish to be that the lessons of the past have been learned,” he writes.
Hayne says he was “not persuaded” that NAB was willing to accept responsibility “for deciding for itself what is the right thing to do and then having its staff act accordingly”.
He says it was “telling” that Henry seemed unwilling to accept criticism of the board’s handling of issues and that Thorburn treated fees-for-no-service issues as “nothing more than carelessness” and “system deficiencies” when the total it has to repay is more than A$100 million.
He also finds it telling that in the same week the executives were giving evidence to the commission, one of the NAB’s staff was emailing bankers urging them to sell five mortgages each before Christmas.
“Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice –remains,” he says.
The commissioner recommends the law be changed to legally require mortgage brokers act in their clients’ interests and to stop them and financial advisors from taking advantage of clients.
He says banks must not be allowed to pay mortgage brokers’ fees.
He also says that funeral expenses policies should be considered as financial products and purchasers of them protected under the ASIC Act.
Hayne says the banking code of practice should be amended to better protect clients who live in remote areas or speak poor or no English, especially Indigenous people.
He proposes a new national farm debt mediation scheme be established and new rules be made for dealing with distressed agricultural loans.
The Commissioner also recommends changes to better monitor the quality of financial advice and implement compulsory disclosure when advisors are not independent.
He proposes a new registration scheme for financial advisers and a ban on hawking superannuation and insurance products, and recommends a change to prudential standards governing executive pay to encourage “sound management of non-financial risks” and reduce the risk of misconduct.
Keeping the ‘twin peaks’
Hayne recommends the existing so-called “twin peaks” system of regulation involving ASIC and APRA remain but that a new oversight body be established to monitor their activities.
He says regulators must be more ready to prosecute, recommending four-yearly reviews and the possible future establishment of a civilian prosecuting agency – a kind of civilian director of public prosecutions – to take over the role of determining whether legal action should be taken, if the regulators prove unable to act.
The commissioner says that in future, the regulators must do more than just reprimand institutions and wave through bad behaviour.
Instead, they must start from a point of asking: why not litigate?
The commissioner slammed the whole banking and financial services industry for allowing greed to dictate practice.
Treasurer Josh Frydenberg says the government accepts the system needs a complete overhaul.
"There have been broken businesses, and the emotional stress and personal pain has broken lives,” Frydenberg said.
"In disbelief, the nation has heard evidence of hundreds of millions of dollars in fees for no service, the charging of dead people and the sale knowingly of worthless insurance policies," he said. “From today, the banking sector must change and change forever.”
The Australian Banking Association chief executive Anna Bligh said the report was a roadmap to a comprehensive overhaul of the banking industry in Australia.
“Banks are determined to learn the lessons, to fix the problems and to make it right. “And every part of the industry is as determined as any other.”
Bligh welcomed Commissioner Hayne’s decision not to recommend any further tightening of lending in Australia.
Karen Middleton is The Saturday Paper’s Chief Political Correspondent.