On Friday Kenneth Hayne, the man charged with carrying out the royal commission into the banking and financial services sector, released his long-anticipated interim report.
It was expected to be a damning document, and Commissioner Hayne did not disappoint. In the words of Treasurer Josh Frydenberg, it was a “frank and scathing assessment” of the sector.
But what exactly did the banks do that was so terrible? The headline acts of misconduct are well-known: charging fees to dead people, charging fees for no service, irresponsible lending, and lying to the regulators, among others.
But there’s a lot more going on than just that. After all, the interim report is around 1000 pages long – and doesn’t even include superannuation and insurance, which were two of the more explosive rounds of hearings.
So here, in summary, are some of the ways Australia’s banks have been found to be cheating, robbing, and generally ripping off their customers – all for their own profit.
Round 1: Mortgages and lending
The first round of public hearings kicked off on March 13 in Melbourne, with a focus on “consumer lending”.
It shone a light on the big banks’ mistreatment of consumers in relation to residential mortgages, credit cards, and car finance, ‘add-on’ insurance and “so-called ‘processing errors’”.
NAB’s “introducer” program and fraudulent loan applications set the tone for more scandalous revelations to follow.
The introducer’s program saw third parties, including lawyers and real estate agents, receive secret payments from NAB in exchange for referring customers to the bank for home loans.
NAB identified 2480 customers affected by the shadowy program.
Next up, ANZ admitted it had engaged in “misconduct and conduct falling short of community standards and expectations in connection with home loans, credit cards, processing errors and car finance”.
One example related to “inconsistencies” between upfront interest rates offered to credit card holders, and those actually charged – an indiscretion that hit tens of thousands of customers, and cost ANZ more than $10 million in compensation payments, the report said.
Similarly, Westpac admitted to charging higher interest rates to credit cards than allowed by ASIC, affecting almost 70,000 customers.
Westpac also confessed to breaching responsible lending obligations in a deal with ASIC announced on September 4. The bank agreed to pay a $35 million civil penalty for a litany of breaches including automatically greenlighting 10,500 home loans that should not have been approve.
The interim report also highlighted a case in which Westpac approved a loan referral from a third party broker for a home loan of over $529,000 to an 80-year-old man who spoke poor English.
“A credit card debt approved at the same time was later written off,” the report said.
The report was also scathing of the evasive, “deficient” responses by CBA in regards to its home loan lending practices.
“When the Commission asked CBA (and others) to specify more precisely what misconduct it had identified over the previous five years, CBA protested that it could not do this within the time allowed,” the interim report said.
Round 2: Financial Advice
The commission’s financial advice hearings uncovered some of the clearest examples of misconduct from the entire six rounds so far, and Commissioner Hayne did not hold back in his criticisms of the industry.
He was highly critical of the incentives-based culture of the industry, dismissing the banks’ attempt to blame misconduct on “a few bad apples”.
“That characterisation serves to contain allegations of misconduct and distance the entity from responsibility. It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity,” he said.
Commonwealth Financial Planning, one of a number of financial advice businesses owned by the Commonwealth Bank, was specifically listed by Commissioner Hayne as an example of this. Almost 30 advisers were found to have put their clients in high-risk, profit generating products that just weren’t right for their needs.
When all of this was mentioned in the Bank’s annual report however, then chief executive Ian Narev referred to the problem as “the poor actions of some of our financial planners”.
“Rhetoric of this kind is common,” Mr Hayne said in his report.
“The misconduct acknowledged by the major entities gives rise to broader questions than those answered by the ‘few bad apples’ response.”
The Commissioner also warned that conflicts of interest might lead to advisers looking to benefit themselves at the expense of consumers.
His misgivings over conflicts of interest stemmed from several case studies presented to the commission, and is evidenced in an ASIC report which found advisers working for AMP, ANZ, Commonwealth Bank, NAB, and Westpac have directed two-thirds of their clients’ money into in-house products, despite those products making up only a fifth of the products they’re permitted to recommend.
“Advisers will often be readily persuaded that the products ‘their’ licensee offers are as good as, if not better than, those of a rivals,” Commissioner Hayne said.
“And when those views align with the adviser’s personal financial interests, advising the client to use an in-house product will much more often than not follow as the night follows day.”
The third problem wasn’t with the banks at all. Instead, Commissioner Hayne said government needed to look at whether or not the regulators appointed to police the industry are any good at what they do.
Round 3: Small business
The third round of hearings focused on banks’ treatment of small and medium sized enterprises.
Small businesses are crucial to Australia’s economy, representing 97.5 per cent of all businesses in Australia and employing 44 per cent of people in the private, non-financial sector, Commissioner Hayne said.
The commission revealed numerous instances of bad behaviour by banks including Westpac, CBA and Bankwest to Rabobank, ANZ, Macquarie, BOQ, NAB, and Suncorp.
Examples ranged from bank staff engaging in “inappropriate sales practices in an effort to increase incentive payments” to overcharging fees, failure to complete credit checks, and failing to respond to customers’ notifications regarding financial distress.
Round 4: Agricultural lending
The commission’s hearings into agricultural lending found similarly concerning practices among the major lenders, which for agricultural lending were ANZ, CBA, NAB, Rabobank, Rural Bank, and Westpac.
The first of Commissioner Hayne’s concerns was that banks were sometimes revaluing land or other assets used as security in getting a loan. This affects the loan-to-value ratio, or LVR, which is a common measure used by lenders to assess how risky a loan might be.
Once the land had been revalued, the banks were using the new LVR as a ‘nonmonetary default’ – something that allowed them to call up the loan, and in some cases provide farmers with very little time to pay the money they owed back.
Another problem was that banks can be difficult to access when you live out in rural districts, so many farmers had a hard time speaking to the bank staff responsible for managing their accounts.
Farmers also complained that this issue was compounded by what they saw as banks not understanding “seasonal variations in cash flow” or the impact of droughts and natural disasters when choosing to take action on loan defaults.
Finally, Commissioner Hayne found that banks were changing the conditions of a loan in ways that hurt the farmers on the borrower end of the deal, sometimes by changing the interest rate.
The interim report also criticised the sector’s regulator ASIC.
“When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done,” the report said.
“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct.”