When the big four banks are called to Parliament to face their first public hearings on October 4, 5 and 6 it is worth remembering that financial misconduct isn't unique to Australia.
It's a global problem, the cost of which has recently been pegged at more than $400 billion for the top 20 banks globally.
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Banks review staff bonus system
Plagued by scandals stemming from staff bonuses and commissions Australia's banks commission a review of their internal practices.
It is one reason why the argument that a royal commission would hurt Australia's banks internationally is lame.
The most recent international scandal erupted a few days ago in the US, where it was revealed that staff at Wells Fargo – driven by pressure to cross-sell products – created 2 million customer accounts without authorisation. More than 5000 staff have since been fired.
The figures involved aren't huge. An estimated $US1.5 million of fees were charged for these unwanted accounts, but the regulator fined the bank $US185 million. Executives will soon front a Senate inquiry to answer questions about what went wrong and why.
Wells Fargo boss John Stumpf recently gave an insight into the bank's thinking on the scandal. In an interview with The Wall Street Journal he said the fraudulent accounts were not a result of the culture at the bank but should be blamed on the staff involved. "Do I wish that we would have every person do everything perfectly every day? Absolutely," Mr Stumpf told the WSJ. "But the 1 per cent that did it wrong, who we fired, terminated, in no way reflects our culture nor reflects the great work the other vast majority of the people do. That's a false narrative."
It seems to be an attitude taken from the playbook of banks globally that have been embroiled in scandals. Most argue the problems happened in the past, were caused by a few rogue employees, and that compensation will be forthcoming. The problem is, it still keeps happening.
In the five years to 2015, Australian financial institutions clocked up $10 billion in conduct costs, according to the UK Conduct Costs Project Association.
Stewart Oldfield, the principal of industry intelligence firm Field Research, says industry experts believe Australian financial institutions are fast catching up to their counterparts in the UK when it comes to building up exposure to so-called conduct risk, which could have a meaningful impact on future returns to shareholders.
In a note to clients, Oldfield said there were signs that costs associated with misconduct in Australia could rise sharply with the British misconduct industry (an assortment of legal and claims management firms) seeing Australia as the next growth market, and allocating resources accordingly.
Misconduct has not only spawned a growing business for lawyers, consultants and auditors, it has created a burgeoning field of academic research into what happened and how it should be fixed.
The Conduct Costs Project has put a figure of $419 billion on the global cost of financial misconduct between 2009 and 2014 – tallying up all court-enforced penalties, settlements and regulatory fines forked out by financial institutions.
The current penalty regime acts as an encouragement to misconduct, due to the quite laughable amounts involved.
Dr Andy Schmulow
While the US is dealing with the fallout of the latest scandal, in Australia the regulator has been busy pumping out press releases of its own.
In the past month, three of the big four banks have been hit with fines and refunds after short-changing or doing the wrong thing by more than 1.3 million customers.
, Commonwealth Bank paid four infringement notices totalling $180,000 and wrote off $2.5 million in customer debt after breaching responsible lending laws in personal overdrafts.
The day before that, Westpac refunded $9.2 million to more than 160,000 customers, having charged fees it was supposed to waive. On September 8 Westpac refunded $20 million to more than 820,000 customers after failing to clearly or properly inform credit card customers they would be charged foreign transaction fees for overseas purchases made in Australian dollars.
Then there was the press release about ANZ paying out $29 million to more than 390,000 customers for unclear disclosure.
They follow a string of other issues in the past year, including an $80 million refund paid by CBA late last year after overcharging hundreds of thousands of customers.
In April 2015 ANZ paid $30 million for misleading 8500 clients who bought a bundled financial planning package, branded as Prime Access, by charging them for advice they didn't receive. In July 2015, National Australia Bank agreed to repay 62,000 customers who had accounts on the Navigator Wrap Platform $25 million after the bank identified "errors" in the way income and tax was allocated to accounts.
Then in October 2015, CBA announced it would pay $8 million to 8400 agribusiness customers. In the same month Westpac was pinged for flogging loan protection insurance to more than 8000 customers who might not have needed it. The penalty was the bank had to contact more than 10,000 customers and offer refunds, estimated at more than $8 million.
For those who say there aren't systemic issues, how do they explain the CBA financial planning scandal? CommInsure, National Australia Bank's financial scandal in its advice arm and in the UK? Or Macquarie and others, all of which have been found wanting in servicing some of their customers fairly and honestly.
The banks have been busy hiring consultants and lawyers to address conduct issues, which is a positive start.
But wrongdoing can't be brushed under the carpet.
In addition, the penalty regime in Australia needs to be far harsher.
Dr Andy Schmulow, a senior lecturer at the University of Western Australia, believes the current penalty regime acts as an encouragement to misconduct, "due to the quite laughable amounts involved".
In its submission to the now defunct Senate inquiry into penalties for white collar crime, the corporate regulator, the Australian Securities and Investments Commission, said the maximum penalties in Australia for breaking the law governing financial sector conduct was "low" by international standards.
It said ASIC cannot seek disgorgement of profits in relation to civil contraventions. As such, it argued, current penalties were unlikely to act as a credible deterrent against misconduct by large firms. Indeed.
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