Banking royal commission: Hayne focuses on reform, transparency

The Australian 12:00am March 10, 2018

Richard Gluyas

On Tuesday morning, the public gallery in the commonwealth law courts in Melbourne will rise as Kenneth Hayne eases himself into a well-padded seat, signalling the start of the financial services royal commission’s first round of public hearings on consumer lending.

The truth is, however, that the commission began reversing the natural order of things weeks ago, if not months.

Agencies like ASIC, which are used to showering miscreants with notices to produce sensitive documents, have instead been on the receiving end of their own deluge, while Commonwealth Bank chief-executive-in-waiting Matt Comyn chose Wednesday to dump a couple of troublesome products.

Comyn might have been putting his own mark on the bank, but there’s no better place to start clearing out the CBA trash than two add-on insurance products in a segment already targeted by Hayne in his initial March 13-23 hearings.

That’s the thing about this royal commission — the major banks know exactly where it’s going because the law enforcement work has already been done.

A simple web search of any one of the 10 consumer-lending case studies, along with the offending institution, will throw up an ASIC press release giving chapter and verse on the nature of the misconduct and the details of any penalty or remediation program.

The same will apply in the second round of hearings on the financial planning and wealth management industry.

The commission revealed yesterday that those hearings will start on April 16. So, if the law enforcement side is already done and dusted, why all the fuss? Why create a self-sustaining, $250 million-plus micro-economy of privileged lawyers and bankers?

The answer is twofold — first, the political imperative for the Turnbull government became overwhelming, and second, the real purpose of the Hayne royal commission is not to re-litigate old grievances but to examine the case for financial services law reform.

As one senior barrister, who is acting for a major institution, says: “Ken is concentrating on areas of known misconduct to see if the process worked well.

“Yes, there’s been lots of cases resolved by regulators, but there’s been very little significant law reform.”

A senior partner at a law firm agrees.

“It looks like there’s been a process failure because the misconduct was repeated after the enforcement action occurred,” he says.

“So Ken will want to get to the bottom of that, but he also might end up dispelling the notion that the process was handled badly.

“He’s quite a serious fellow and hasn’t been given a lot of time so he won’t want to waste it.”

Hayne’s intention to focus on the big picture instead of getting tangled in the weeds of individual disputes has been clear from the start.

Earlier this month, when Maroochydore-based Willem Bannink asked for leave to appear before the commission, claiming to have evidence of fraudulent contracts and fake bank accounts, he was rebuffed because he failed to show he would be affected “in a way, or to an extent, that is different from the public generally”.

Hayne himself said in his opening statement on February 12 that he wouldn’t have time to publicly examine every case of misconduct and would have to proceed by way of case studies.

In many cases, he said, poor conduct had already been admitted or acknowledged.

“In those cases, the commission must focus on why the conduct occurred; what was the response by the relevant entity and regulators; what should have been the response; what if any recommendations should now be made,” the commissioner said.

More was to be gained from this approach than re-proving admitted behaviour.

It was no surprise that CBA, like Bannink, was given short shrift earlier this month when it asked Hayne for details of its dispute with a customer to be kept secret, including the bank’s dealings with ASIC over the design, cost and implementation of a remediation scheme.

“What CBA did in response to the conduct is an important part of the commission’s inquiry,” he ruled.

Clearly, the commissioner prefers sunlight as a disinfectant, particularly when it comes to targeted institutions.

After reading the CBA ruling and assessing the general “vibe” of the commission, the major banks have decided to stick their heads well below the parapet, in contrast to some of their adversaries.

National Australia Bank and CBA, for example, were caught out by the Finance Sector Union on Tuesday.

Not only did the union reveal it had won the right to appear before the commission, but it released new information about two of the 10 consumer lending case studies — the NAB introducer program and fraudulent loan applications, and add-on credit insurance provided by CBA.

Rather than risk incurring Hayne’s wrath, NAB kept quiet about the FSU’s claim that the bank had started a further disciplinary investigation into the introducer program, which rewards businesses for lending referrals.

While 20 bankers lost their jobs and a further 35 suffered adverse consequences, the union said the bank had failed to address the underlying problem of NAB’s aggressive sales practices and incentive-based remuneration.

It also condemned the bank’s scapegoating of “rogue” employees, alleging senior management involved in the design of the program had emerged unscathed.

NAB is likely to dispute this, as well as the suggestion that it’s reinvestigating the program.

The FSU, for its part, is unrepentant.

National secretary Julia Angrisano says the banks are scrambling to address some of the issues targeted by the commission, but the behavioural impact of remuneration structures has largely been overlooked.

“So we’re not going to accept the ‘rogue banker’ explanation when there are systemic failures in the system that go back to remuneration,” Angrisano says.

“To say, like NAB has with its introducer program, that they have dealt with 20 bad lenders is not going to solve the issue.

“Our members are loyal and hardworking employees and they want to improve their professional standing — banking used to be an important and proud profession, and we believe the royal commission provides an opportunity to restore that.”

As to any wider issue with loan application fraud, it’s unclear if Hayne will broaden his focus.

Last month, the Federal Court ruled that ANZ had failed to take reasonable steps to verify the income of a number of car finance customers.

In 12 car loan applications from three brokers, ANZ had relied solely on pay slips despite knowing they could be easily falsified and having reason to doubt the reliability of the information supplied by the brokers to the bank’s Esanda unit.

UBS analyst Jon Mott says the decision could have significant implications for the banks’ $1.6 trillion mortgage businesses.

While mortgages in Australia are considered to be full-documentation products, Mott says the usual practice is that the borrower’s income is verified by two or three pay slips.

The banks, he says, are at risk of being found not to have sufficiently verified their customers’ income in the mortgage application process.

“(This) not only exposes the banks to credit risk should the cycle turn, but could also potentially leave them exposed to class actions for breaches of responsible lending,” Mott says.

The same analyst estimated in September last year that the value of so-called “liar loans”, where borrowers over-estimate their incomes and underestimate their expenses when applying for a mortgage, was $500 billion. This posed a threat to the banking system and the wider economy.

“Mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate,” Mott said.

The industry rejected the analysis, saying it failed to take account of their serviceability buffers and other sources of borrower information.

As any banker will now tell you, the circus has hit town, with the show lasting most of this year.