Royal commission chief Kenneth Hayne should break up banks

The Australian 12:00am February 17, 2018

Alan Kohler

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry got off to an innovative start in December with commissioner Kenneth Hayne asking his class to set out their misconduct in 50 pages or less, quick smart.

“Right then, what have you been up to? Come on you lot, I haven’t got all year. Out with it!” (Arms folded, foot tapping.)

All responded with their 50 pages, on time, but some of the essays were not up to scratch.

“You there, what do you call this?” he said this week. “I asked you to specify the nature, extent and effect of your misconduct, but you just listed the nasty things you did, you disgusting bank. Not good enough!”

“Sorry sir, but we can’t do it. You haven’t given us enough time.”

“What? Nonsense! You’ve had since December 15. What have you been doing? Did you go on holidays, you stupid bank? This is another item for your misconduct list! Write it down.”

It promises to be a lively and interesting year, full of sound and fury that could easily signify not very much. But there’s a lot of sewage to flow under the bridge first, and I have an idea about how to make Ken Hayne’s work signify something.

But the first job of any royal commissioner is to come on all fierce and let everyone know that you’re nobody’s patsy. Tick.

Next job is to ensure there is a steady flow of gruesome stories that will make the thing seem like money well spent. That shouldn’t be too hard: by last Monday 385 submissions had come in, quick as a wink, of which half had to do with banking and a third came from Queensland, where they know how to complain. And counsel assisting, Rowena Orr, said the flow was increasing each week.

And we can be fairly sure that none of them is complimentary: 84 per cent, said Orr, related to misconduct, 40 per cent to culture and governance and 35 per cent to the effectiveness of redress (which equals 159 per cent, so clearly a few went for the complaint trifecta — perhaps the ones from Queensland).

In some ways the mere airing of all this is job done, although, as Hayne said this week, he won’t have time to “publicly examine every case of alleged misconduct”. He’ll have to pick and choose.

In any case, the final job of a royal commissioner is to produce a report and to make recommendations — to sum up the rivers of misconduct that had flowed through his “court” over the previous months, and to write his judgment, shaking his head more in sorrow than anger and slapping the birch on his hand. It’s that to which we address ourselves today: what possible recommendations could Kenneth Hayne make?

Better targeted remuneration, for a start — not just based on TSR (total shareholder returns), or even customer satisfaction, which has its flaws as well.

Perhaps a “Culture Police” division of APRA to be a sort of continuous royal commission. And of course, the appointment of St Simon Longstaff of the St James Ethics Centre to the board of every financial services organisation in the land is an obvious one.

But if he wants to really make a splash, to be remembered as a reformer in the mould of Campbell and Wallis, Hayne will need to recommend that the banks should be broken up.

I don’t mean broken into the smaller banks that existed before the great mergers of the 1980s — the ones that should never have been allowed to happen but did, and it’s now too late to undo — but rather force them to divest the wealth management businesses they bought in the early 2000s.

Westpac bought BT, NAB bought MLC, CBA bought Colonial First State and ANZ went into business with ING (and is now out of it). These were disastrous ­acquisitions for all concerned (apart from the vendors, of course) — for the customers, the community and the banks themselves. The cultures were too different and bank customers, it turned out, didn’t really want to buy superannuation from tellers.

But most of all the creation of ­financial conglomerates set up inherent and unresolvable conflicts, especially in the new world FoFA legislation that bans commissions and requires the “best interests” of clients to be put first. Each of the banks now owns wealth management businesses and employs hundreds of financial planners.

The planners are almost entirely unprofitable as stand-alone businesses. They are there to be “distribution arms” for the banks’ wealth management divisions, yet the law requires them not to do that. They are required to put the client’s interests first and to not “distribute” the products of the bank that employs them.

Yet it turns out that most of the products recommended by bank-owned financial planners are from their own bank. There aren’t allowed to be financial incentives in the form of commissions, so there appears to be other less tangible ones — and in a way there have to be! Otherwise there is no point in a wealth management business owning loss-making financial planners. My sense is that the banks would love to get out of this infernal mess, but can’t. The businesses can’t be sold because FoFA has made them pointless and worthless and only ANZ has had the courage to wriggle out.

Hayne should do everyone a favour, and immortalise himself, by recommending forced divestment. The banks would shrug, tell their shareholders they have no choice, and scramble out of wealth management with a financial loss and a glad cry.