Banks behaving badly

It’s been seven years since the 2007–09 GFC abated. However, it was a disaster so extensive and pervasive that, despite the passing of time, many individuals and institutions remain affected. In the years since the calamitous GFC, the banking and finance sectors have seen a number of regulatory changes take place, in spite of which, banks continue to falter. In the last year alone, international scandals such as Wells Fargo, as well as multiple controversies among Australia’s big four banks and others have dominated headlines.

Banks have long been a source of consumer outrage; however, the GFC prompted a unified response and demand for real change. While the root cause of the crisis was attributed to the banks’ inability, or unwillingness, to accurately read economic conditions — taking risks by giving loans to unsuitable applicants — it was the regulatory bodies which eventually fell under the spotlight; accused of inadequate surveillance, supervision and guidance.

Independent economist and Vice-Chancellor’s Fellow at the University of Tasmania Saul Eslake speculates that, "In some cases, the insufficient regulation was the result of ideological aversion to such supervision and regulation. In some cases, it was the result of fragmented authority and responsibility, and in almost all cases an inability on the part of regulators to attract and retain staff of sufficient calibre."

"Responsible lending, as legislated in the National Consumer Credit Protection Act has meant that consumers can only be given loans that they can afford to pay for." – Marcus Roberts, Mirador Wealth Management

As a result of the crisis and global backlash, a number of changes were implemented within the sector. "In the US, the Dodd-Frank Wall Street Reform act was passed in 2010," explains Marcus Roberts, financial advisor with independent wealth management company Mirador Wealth Management. "The aim of this act was to put a number of protections in place including the regulation of many derivatives, consumer protection against high-risk lending practices, and rating agencies being made subject to reviews."

Similarly, in Europe, new supervisory bodies were established and changes were made to the way bank staff could be remunerated, with a higher deferred structure, and the potential for a clawback mechanism. "Basel III, a global, voluntary regulatory framework, was agreed upon as a response to some of the shortcomings in regulation post-GFC," says Marcus.

Still, the sector continues to be plagued by controversy and behavioral misdeeds. For instance, last year’s Wells Fargo case saw hundreds of thousands of accounts opened without the knowledge or approval of consumers. The express purpose of this was to bolster the chances of Wells Fargo staff reaching their sales targets.

Another example is the Libor scandal — a set of fraudulent actions linked to the Libor (London Interbank Offered Rate). Exposed in 2012, it
was revealed that various banks had falsified interest rates in order to profit dishonestly on trades or overstate their credit worthiness.

Differences down under

Although Australia was less affected by the GFC than the rest of the world, it hasn’t been immune to its consequences, or the subsequent cases of misconduct. "One of the reasons why Australia’s experience of the GFC wasn’t as severe as other countries’, is that the RBA [Reserve Bank of Australia] didn’t make the mistake of leaving interest rates too low for too long in the early 2000s," explains Saul.

"Also, APRA [Australian Prudential Regulation Authority] did a better job of supervising Australian banks than its counterparts in other countries, partly because of the ‘wake-up call’ following the collapse of HIH at the beginning of the decade, and the findings of the subsequent Royal Commission into that collapse."

Saul suggests that, as a result, APRA's regulation of scandals — such as NAB’s foreign exchange options trading disgrace in 2003–04, and ANZ Bank’s involvement in the Opes Prime case — has been far more tightly controlled. "We haven’t had the same levels of reform that many other nations have had, but responsible lending, as legislated in the National Consumer Credit Protection Act has meant that consumers can only be given loans that they can afford to pay for," says Marcus. APRA has provided further refinements when needed, such as the crackdown on foreign investor lending and interest only loans which have occurred over the past 12 months.

However, Australia isn’t immune to dubious behaviour within the banking and finance sectors. Towards the end of last year, the CEOs of Australia’s four big banks — the CBA’s Ian Narev, Westpac’s Brian Hartzer, NAB’s Andrew Thorburn, and ANZ’s Shayne Cary Elliott — fronted a parliamentary inquiry following consumer swindles, dishonest financial planning advice, forged documents and overall unethical behaviour. Each of the big four was haunted by their own scandals throughout this inquiry, the common denominator being the banks’ profits.

While consumers and Labor are calling for a royal commission following the inquiry, Saul says it would do little more than provide victims with an opportunity to vent their grievances."It almost certainly wouldn’t tell us anything we don’t already know," he says, "and it wouldn’t recommend anything that hasn’t already been suggested, in particular by the Murray Inquiry." Saul attributes the frequent and long-standing accounts of misbehaviour to simple greed. "And I don’t think there is any legislation or regulation that can completely prevent this. Perhaps there ought to be more emphasis on sending people to jail and less on levying big fines."

Lindsay David, founder of LF Economics, agrees that regulation is not the problem, particularly within Australia. "What we have is an enforcement issue," he says. "ASIC and APRA seemingly refuse to enforce the law when it comes to serious allegations. Hence our regulators themselves may be deliberately obstructing justice. Our forensic research of the Australian banking system suggests this to be the case."