It was targeted lobbying at its best and most sophisticated, and Argus won. The code was downgraded from a mandatory code into a voluntary code and some key recommendations were removed. Proposed responsible lending requirements were also diluted. A credit assessment ‘obligation’ was imposed on the banks.
But it failed to set any specific standards, rendering it virtually useless. The industry had fought back and Canberra had buckled. A banking ombudsman with a narrow brief, and a watered-down banking code of practice was the sum total for reform.
The result of all this was to effectively give the green light to the banking sector to do whatever it wanted. Over the next twenty years there would be a number of iterations of the banking code, but they clearly never went far enough. The power imbalance between customers and the banks grew starker and more dangerous. The importance of the customer was forgotten in the quest to build market share and profits.
With the Martin Inquiry behind them, and self-regulation in place, the banks were now within reach of the rivers of gold that would flow after the opening up of superannuation. But the banks were still minnows in this area in comparison to the insurance companies, which had a century’s life insurance business behind them, and weren’t about to give up access to the new funds sloshing around without a fight.
The compulsory superannuation legislation spawned a huge number of funds and almost guaranteed sloppy practices would arise in the market.
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The new Superannuation Industry (Supervision) Act, which came into effect on 1 July 1993, made it clear that banks would have to hand over their own staff pension funds to external managers if they didn’t start offering funds management themselves. As a result, the banks began chasing mergers and acquisitions, seeking to expand rapidly and create synergies by cross-selling bank products and financial products and economies of scale, and spreading their tentacles further into funds management. A new buzzword emerged, ‘bancassurance’, or ‘vertical integration’, meaning the cross-selling of customers’ banking and insurance – a practice that would dominate the next two decades.
Meanwhile, Allan Fels was busy meeting bank chiefs, who were determined to soften him up in the hope that with enough political lobbying the so-called ‘four pillars policy’ would be scrapped. The four pillars policy, which prevented the four big banks – ANZ, CBA, NAB and Westpac – merging with each other or buying attractive insurance companies like AMP, had been introduced by Treasurer Paul Keating in May 1990 when he rejected a proposed merger between ANZ and the country’s second biggest life insurer, National Mutual. In a press release explaining the rejection, Keating drew on national interest, saying, ‘It is vital for the efficient application of the nation’s savings that there should be a reasonable diversity of institutions and effective competition in banking, in life insurance, and more generally in the provision of financial services.’ It was the government’s judgement, Keating said, that a merger between a major bank and a major life insurer would hurt competition.
Fels regarded the proposed mergers between banks and insurers as a case of the ‘nirvana fallacy’, he says. ‘Every CEO dreams of taking over another bank but what they really want is an empire twice as big as before. They said it was about savings and removing duplication but I didn’t buy it.’
Whatever the case, there was a constant stream of bank chiefs visiting Fels at the TPC’s head office in Canberra. One of Fels’ most frequent guests was Bob Joss, an American with an MBA and PhD in economics, who had moved to Australia to become the CEO of Westpac in early 1993 with a board mandate to fix the bank and return it to its former glory. Westpac had suffered in the early 1990s after a series of debtors with big commercial property loans defaulted after the stock market crash, and it was struggling under a mountain of debt, a $1.6 billion loss and a new shareholder on its register – billionaire Kerry Packer.
Joss was an abrupt departure from previous Westpac chief executives. He had come from the Californian-based bank Wells Fargo, and the salary he demanded was more than the combined salaries of the other three big bank CEOs. His five-year contract promised a pay packet of $38 million to $45 million if he met all his share price and performance targets.
Joss became known as the bank executive who pioneered options packages, and his salary triggered a ‘me too’ response in banking circles, with other bank chiefs demanding similar aggressive performance-based remuneration structures which they could extend down the ranks of management.
Together with increasing pressure from institutional shareholders to deliver greater returns, these new mega salaries accelerated the move towards even more aggressive sales programs designed to boost profits and, in turn, increase share prices. It became a case of: ‘Why sell two banking products to a customer when you can sell them four?’
Salary packages were structured to ensure performance was based on shareholder returns, and by the mid-1990s incentives were being attached to sales, further entrenching that culture. For boards and management, the higher the profit, the bigger their bonuses.
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Of course, another way to increase a bank’s returns was through cost-cutting. As David Murray and executives at the other banks had done, Bob Joss accelerated cost-cutting initiatives, including retrenching thousands of middle managers, selling operations overseas and renewing Westpac’s focus on retail banking. Branches were closed and new transaction fees introduced. To ensure Westpac was employing the right people, psychometric tests were introduced to identify extroverts with a bent for sales.
Between 1993 and 2000 about 1800 bank branches closed across the banking sector, equating to a loss of about 40,000 banking jobs. Technology was the convenient excuse. ‘Banks now are open 24 hours a day, seven days a week, rather than 10 am to 3 pm,’ the Australian Banking Association told the Sydney Morning Herald in 2000.5
Prior to the deregulation of the financial system, fees charged to customers had been almost unheard of. But during the 1990s they boomed. According to the interest-rate comparison company Cannex Australia (now called Canstar), the average base fee among the four major banks rose 75 per cent between 1993 and 1998. Over-the-counter fees soared 276 per cent and ATM fees increased by 112 per cent.6 Retail banking was now all about cutting costs, fees, sales and shareholder returns.
Bob Joss had extensive funds management experience and, like executives at the other three major banks, was keen to promote vertical integration so that more customers could be sold a variety of products. It was a no-brainer: traditional banking was seen to be in decline, and funds management was growing at double-digit rates.
Joss was also keen to dismantle the four pillars policy, hence his intense lobbying of Fels. The four pillars might have been a sacred cow, but smaller banks and fund managers weren’t. To this end, the 1990s would see a number of institutions swallowed whole. In the wake of CBA’s purchase of the State Bank of Victoria, Suncorp bought Metway Bank in 1996, Advance Bank bought the State Bank of South Australia in 1995, Westpac bought WA-based Challenge Bank in 1996 and the Bank of Melbourne in 1997, and St George Bank bought Advance Bank in 1997.
Colonial Mutual made the biggest acquisitions in the 1990s, buying up the State Bank of NSW in 1994, Prudential, Legal & General in 1998, and then the Trust Bank of Tasmania in 1999. There was even talk that Colonial would march on Bankwest and then one of the big four banks.
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All of this presented challenges for the industry regulators, which at the time were going through a phase of reorganisation and reconsolidation. In 1997, the Wallis Inquiry, headed by businessman Stan Wallis, was tasked with reviewing the post-deregulatory environment and ensuring the right systems were in place for the oncoming technological changes and moves by the banks into superannuation. There were many overlapping supervisors, including the ASC and the Insurance and Superannuation Commission. The Reserve Bank was the prudential supervisor of the banks, while credit unions were regulated by the states. Industry participants complained there was
too much administrative red tape.
Wallis was handpicked by the Howard government, which had taken office the year before. Wallis was a corporate blue blood sitting on the board of the country’s biggest financial institution, AMP. He was never going to rock the boat. Although he took a leave of absence from AMP while he completed the inquiry to try to improve the optics of his appointment, it really didn’t matter.
Not surprisingly, the Wallis Report recommended the continued support for light-touch regulation with the added twist that the regulator needed to be mindful of the compliance costs on the institutions it regulated.
The financial services sector embraced the findings of the Wallis Report, which also included recommendations to streamline regulatory reporting by creating two mega-regulators, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC), both established on 1 July 1998. They would become known as the twin-peaks regulators.
APRA would be the prudential regulator for banks, credit unions, superannuation funds and insurers, and the other prudential regulators would either close or, in the case of the Reserve Bank, be stripped of its prudential supervisory powers. Importantly, APRA was funded largely by the industries that it supervised, which arguably put it in a compromising situation as the policeman being funded by those it policed. ASIC replaced the Australian Securities Commission (ASC) and was given a broader remit to cover consumer protection in financial products and services, as well as financial advice.
In his final report, Wallis said: ‘[ASIC] should adopt a flexible approach to regulation. No one model of regulation should be imposed on the whole system. Where industry standards and performance suggest that the most practicable method involves self-regulation or co-regulation, such methods should be preferred.’ He also recommended: ‘In all cases, the cost effectiveness of regulation should be subject to ongoing stringent assessment.’ It was music to the industry’s ears.
Under Wallis, APRA and ASIC would adopt what’s known as a disclosure-based approach to regulation, which operated on the assumption that companies would always provide full details and conditions of products to consumers, who could then make an informed decision. Essentially it was caveat emptor or buyer beware. Where any breach of a regulation was detected, companies were expected to own up to the relevant regulator by sending it a breach notice. Rather than a fine, this usually resulted in a negotiated settlement, often involving a donation to a charity or community cause, or an enforceable undertaking, whereby the company simply agreed to implement a set of changes to rectify the problem.
It was light-touch regulation indeed, and although APRA and ASIC considered it an efficient approach, for financial products it was a disaster in waiting. Successive scandals would make it obvious that disclosure was of little value if investors didn’t understand or read the long and convoluted product disclosure statements (PDSs) and other documents they were supplied, which were often written by corporate lawyers in deliberately complex and opaque legal language; nor could it work where a system had thrived by being allowed to exploit its customers’ lack of financial literacy. Buyer beware principles simply helped fuel the culture of greed and entitlement inside the banks.
And it didn’t end there. To ensure the sector continued to call the shots, the Wallis report recommended the creation of the Financial Sector Advisory Council (FSAC), a non-statutory body comprised of leaders from the financial services sector to advise on ‘developments in the financial system and their implications for regulatory arrangements and on the cost effectiveness and compliance costs of regulation’.
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If it wasn’t so serious, it would have been a joke.
In the meantime, Allan Fels had become the chairman of the Australian Competition and Consumer Commission (ACCC), another national regulator formed by the merger in 1995 of the TPC and PSA. Its mandate was to prevent anti-competitive behaviour, including outlawing mergers or collusion that could stifle competition, and protect consumers from unfair practices, such as false advertising and faulty products. From day one, Fels adopted an enforcement-style approach to regulating rather than a disclosure-based arrangement. If there was a breach of the law, the ACCC went in hard, using a court-enforceable undertaking, legal action or fines. As noted, Fels also enjoyed public naming and shaming in the media.
While the big banks were doing mating dances with smaller banks and financial institutions in order to bulk up, NAB chief executive Don Argus had his sights on the main game – merging with one of the other big four banks. The NAB board had sent Argus to Britain and the United States to study the markets. He came back believing NAB’s future was to become a global giant big enough to take on other foreign banks. To this end he beefed up NAB’s presence in the United Kingdom and the United States while lobbying endlessly in Australia to get the four pillars policy overturned.
NAB’s ambition to topple the four pillars dated back to the early 1990s when ANZ was in serious trouble and Argus visited Treasurer John Kerin with a plan to merge with ANZ. Argus says he still has the letter from Kerin, rejecting the proposal. ‘We tried twice with ANZ but I also think a problem was that Charlie Goode [chairman of ANZ] didn’t want to do it initially because he was new to the chairmanship.’
Throughout his reign at NAB, Argus never gave up trying to dismantle the four pillars. Before the 1996 federal election, NAB became one of the largest donors to the Liberal Party. That generosity failed to sway John Howard, who decreed that the four pillars policy would stay.
Not to be defeated, Argus tried again in 1998 with Operation Edwin, which brought together some of the country’s best lobbyists to find a way to win over the public, the government and Fels to the idea of abandoning the four pillars policy.
Operation Edwin was cloaked in secrecy. Four teams worked on the project, all using different code names, so nobody except one coordinator had complete knowledge of what was going on. Former TPC chairman Bob Baxt was hired by NAB to advise executives on the issues and ways to win over Fels, who Argus believed had it in for the banks. To help with political strategy, Ron Burke, general manager of group corporate relations at NAB and one of Argus’s key advisers, hired Prime Minister John Howard’s own research and advertising team from the previous two federal elections: Toby Ralph, Mark Textor, Ted Horton and Darcy Tronson. Corporate adviser Mark Burrows was put on the payroll to conduct detailed financial analysis on the pricing of the bid and the types of concessions the bank could make. Richard McKinnon, the head of investment advisory at NAB, was put in charge of the project to win over the government and the TPC. An advertising campaign was prepared, including television ads.
Operation Edwin’s initial target was ANZ, and plans were put in place for NAB to announce a $20 billion merger with ANZ after the release of NAB’s annual results on 5 November 1998. I was working at BRW magazine at the time and learned that Argus would prefer a friendly merger with ANZ but was prepared to go hostile if ANZ spurned NAB’s advances. The plan was that, once the deal was publicly announced, NAB would launch a multi-million-dollar television, newspaper and radio campaign to educate the public.
I heard from multiple sources that NAB was so serious about a takeover of ANZ that it had already printed a ‘Part A statement’ – a formal document that outlined the proposed offer – in case it had to make a hostile bid. NAB had set the price and had been lobbying various politicians around the country, saying either that they would not close branches or that they would open branches in the politicians’ electorates.
Howard put a stop to the NAB-ANZ merger at a meeting with Argus in mid-October 1998. It came days after a visit by ANZ chairman Charlie Goode to Howard’s office. Goode was a vocal supporter of the four pillars policy and held a lot of sway in Liberal circles. He sat on the Victorian Liberal Party finance committee and was a trustee of one of the main fundraising trusts of the party.
A few weeks later, on 15 November 1998, Argus called a meeting of senior executiv
es and told them Westpac was the new target.
By early February 1999, the talks between Westpac and NAB had fallen apart and Joss had resigned as chief executive of Westpac. The Westpac and NAB merger was blocked by the Westpac board. A source close to the board at the time said, ‘No one would get into bed with NAB. Culturally, it is a weak fit because NAB would want to dominate everything. It would make a powerful institution, but it would destroy Westpac. Intrinsically, Westpac is in favour of mergers to strengthen the organisation, as long as it doesn’t destroy the culture.’ Although Joss hadn’t stormed out of the bank over a disagreement with the board, it is believed he was disappointed with the decision not to merge with NAB.
Business commentator Alan Kohler wrote in September 1998 that the benefit to bank shareholders would have been at least $10 billion per merger if the four pillars policy had been removed: ‘That’s because if NAB and ANZ merged, management would be expected to cut at least $1 billion a year of costs out of the new group (about a third of ANZ’s total costs). If combined revenue stayed the same profit would increase by that amount. Capitalise that extra profit at existing price-earnings ratios and the new whole is worth at least $10 billion more than the sum of the two parts.’
Kohler went on to say that all the other publicly stated reasons for having bank mergers, including to create ‘national champions’ that can compete globally, or just to satisfy the rampant egos of the executives, came a distant second to the money. ‘Put simply, the prospect of creating more than $20 billion in new value for Australia’s bank shareholders through two mergers that allow staff levels to be cut by another 30,000 or so is impossible to resist.’7
Yet resist they did. Argus left NAB without breaking the four pillars policy. It is a regret that lingers with him today. ‘The frustrating thing is there was never a valid argument given to me as to why [overturning the policy] didn’t make sense,’ Argus says. ‘It would have saved shareholders a lot of money on expensive technology initiatives, and the synergies would have been great.’
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