Banking Bad

by Adele Ferguson

  Following its testimony, AMP lodged a submission with the royal commission in May, attempting to downplay some of the allegations that had been raised. It stated that, based on the company’s own records, AMP had misled ASIC only seven times, not the twenty tallied up at the royal commission.

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  Regan’s royal commission appearance became legendary and left a lasting legacy, in that bank lawyers would subsequently work intensively with witnesses, briefing them on how to frame their responses to protect their brands and prevent incrimination.

  Hodge’s next target was the hard-nosed senior CBA executive Marianne Perkovic, who had previously worked in the bank’s wealth management advice business. She was to begin her testimony on 19 April and talk about her role in the bank’s own fees-for-no-service fiasco.

  As Perkovic settled into the witness box, Jeff Morris and Merilyn Swan tuned in to watch, confident more dirty linen would be aired. Swan had met Perkovic on a number of occasions as she sought proper compensation for her parents, and considered her part of the CBA cabal that regarded the evidence of victims and whistleblowers as little more than an inconvenience.

  Perkovic had a long history in financial planning, having worked at Count Financial for eleven years before moving to CBA in January 2010, a month before whistleblower Jeff Morris went in person to ASIC, forcing it to launch an investigation.

  Hodge’s focus in his questioning of Perkovic was a breach report from 2014. In July of that year, two years after first discovering customers were paying for a service they weren’t receiving, CBA had given ASIC an ‘early warning’, then issued a breach report on 13 August.

  After half an hour of Perkovic ducking and weaving in response to questions, Hodge lost patience: ‘Ms Perkovic, is the reason that you are dissembling in answering my question in order to attempt to pre-emptively explain why it is that CFPL [Commonwealth Financial Planning Limited] took more than two years to notify ASIC of its breach?’

  ‘So, at the point in time in 2012 there was no known breach,’ Perkovic replied vaguely.

  Hayne then intervened. ‘It will be safer for you if you attend to counsel’s questions,’ he advised.

  The tension in the courtroom rose. The more Perkovic tried to answer questions using ‘context’, the more it looked like she was prevaricating. The more Hodge referred to documents to prove his point that CBA knew about the problem but had failed to file a breach report with ASIC, the more convoluted Perkovic’s responses became.

  Merilyn Swan summed up the mood when she muttered to Jeff Morris: ‘Just answer the bloody question. It’s yes or no. It’s not that hard!’ She sent me an email saying, ‘I think I have heard this argument before. We didn’t know what we didn’t know even if we knew it and we knew we didn’t know it.’

  Hodge turned to a memo written by risk management executive Jaime Henderson, in April 2012 which mentioned a ‘brief analysis’ of 257 clients paying ongoing fees for no service, then Hodge took Perkovic forensically through a series of reports that had confirmed there were problems. In one report in June 2012, Deloitte had written, ‘Systems to identify clients that have signed up to and/or receive ongoing service arrangements are inadequate.’ Deloitte also said, ‘The process to identify and communicate with customers in a timely manner is ineffective.’

  ‘Do you say, having received this report, that you still weren’t sure whether you had an issue about the provision of ongoing service to clients?’ Hodge asked Perkovic.

  The gallery craned to hear her response, thinking this might be the one to nail her, but Perkovic was too clever by half. ‘The report told us what we knew,’ she replied, ‘which was that we didn’t have effective systems and monitoring to be able to identify had the service not been delivered. It didn’t tell us that we weren’t delivering ongoing service.’

  Hodge was frustrated, ‘Is the explanation that you want to offer as to why it is that it took CBA more than two years to notify ASIC of its ongoing service fee problems that CBA systems were so hopeless that it had no idea what was going on in its business?’

  Perkovic’s answer was yes.

  ‘Do you agree that CFPL habitually charged clients for services that were not provided?’

  ‘We didn’t know whether the services were provided or not,’ Perkovic replied.

  ‘Well, you knew that at least in the case of 1050 clients it was by Deloitte’s consideration at least highly likely, if not certain, that these clients were not being provided with services because they were allocated to fifty inactive planners. You agree?’

  ‘Yes,’ Perkovic conceded.

  ‘So I will ask my question again: do you agree that as at the date of this report, CFPL knew that it habitually charged clients for services that were not provided?’ Hodge asked.

  Perkovic replied, ‘We knew that we didn’t have the supervision and monitoring to determine whether the services were being provided or not.’

  Hodge had failed to trap Perkovic into admitting a breach report should have been filed two years earlier, but her performance didn’t win her any fans. It was obvious that CBA’s culture was such that it had known there were serious problems with its systems, and there was enough evidence from internal reports and the Deloitte review to indicate customers were paying for a service they weren’t receiving, but it had continued to charge fees for another two years. If CBA was serious about abiding by the law, as soon as it saw Jaime Henderson’s memo it should have suspended payments until a proper investigation had been completed.

  As Jeff Morris listened to Perkovic fail to answer the questions, he got angrier and angrier. It gave him flashbacks of what he had gone through at CBA when he had tried to highlight misconduct and the bank’s executives had refused to admit it was happening. At 3.04 pm, Morris sent a submission to the royal commission (which anyone could do) and forwarded a copy to me. In his text he underlined the fact that fees for no service had been the bedrock not just of CBA financial planning but of the entire industry. Advisers made most of their money on upfront commissions and trailing commissions. If an adviser wasn’t directly employed by the bank but owned their own business and operated under a bank licence, the number of clients on the books and the amount of commissions they generated each year were seen as an asset that could be included in any eventual sale of the company. The usual yardstick for valuing the business was to add up the annual trailing commissions earned and multiply them by four. ‘The reason these income streams were so valuable,’ Morris said, ‘was because, like real estate agents’ rent rolls, they were essentially unearned . . . By contrast, revenues from, say, accounting practices trade on much lower multiples because they actually have to be earned each year.’

  It was this abject failure of culture that resulted in a new twist in the fees-for-no-service scandal: charging dead people for advice. With Perkovic still in the hot seat, Hodge referred to a report by CBA subsidiary Count, dated 2015, called ‘Count Financial Risk & Compliance Forum’, which found a deceased client was charged fees on an account that hadn’t been finalised from 2003 to at least November 2015, despite the planner knowing the client had passed away in 2004. There were audible gasps in the room. The report noted, ‘Adviser provided advice to a client in 2003 who passed away in 2004, adviser is aware that the client is dead but the ASF [adviser service fee] . . . continues to be charged. When asked, he said he didn’t know what to do and had contacted the public trustee but didn’t hear back. Depending on outcome, recommend possible warning to adviser.’

  Nor was this an isolated case. Hodge revealed how numerous reports about the practice had been made to the bank. Two reviews included the comments, ‘One client dies in 2007. Contact made with deceased’s wife in 2013 but no action taken,’ and ‘The last three reviews conducted have indicated that this adviser has provided no advice to any client’ – yet the bank had sat on the reports for years before informing the regulator.

  It was atrocious behaviour. There had been no concern about consequenc
es or customers, and it made a mockery of CBA advertisements and lofty statements about putting customers’ interests first and how the banks fixed problems as soon as they arose.

  If there was any lingering doubt where customers ranked in the priority list of our biggest banks and AMP, the testimony from Regan and Perkovic said it all.

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  I had hoped the royal commission would drill into some of the CBA executives who had left the bank – and moved elsewhere in the industry – after having presided over some of the illegal behaviour, the cover-ups Morris had pointed out (including forgery and fraud) and a compliance team that was ignored. This wasn’t to be because of the commission’s tight deadline. It did, however, shine a light into the dark recesses of financial planning in other organisations, including NAB.

  One widespread practice uncovered there involved getting staff to falsely witness the documents of customers, including insurance policy documents. A NAB planner, Bradley Meyn, forged the initials of a married couple without the clients’ knowledge or consent after failing to properly fill in their death benefit nomination forms. He put the husband’s initials on the wife’s form and the wife’s initials on the husband’s form and asked a bank customer service officer to witness the forms, even though that officer hadn’t been there when the clients signed the forms. Meyn’s employment was terminated in 2016 but he was not reported to ASIC for another six months.

  A review by NAB in early 2017 found that 353 employees, including planners and customer service officers, had been involved in incorrectly witnessing binding client documents. NAB executive Andrew Hagger told the commission he believed the conduct of falsely witnessing statements was attributable to employee indifference and a desire to engage in shortcuts, and blamed it on ‘a failure of discipline’. Rowena Orr described it as ‘a failure of culture’, and pointed out that it could result in estate trustees invalidating the form and making decisions about a client’s estate against their wishes. Even after it became aware of the practice, NAB took six months to lodge a breach notice with ASIC. To discipline the wrongdoers, NAB docked 25 per cent off their bonuses, while the executives in the division lost 10 per cent of their bonuses. Hagger had $60,000 shaved from his bonus that year.

  ‘Which left you with the variable component – the bonus for that year – of $960,000?’ Orr asked.

  ‘Correct,’ replied Hagger.

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  It was fitting that the royal commission’s tumultuous two-week hearing into the financial planning industry, which had revealed so much wrongdoing, closed with a review of the industry’s watchdog, ASIC, to assess whether it had done its job chasing the wrongdoers and protecting the public.

  ASIC chose Louise Macaulay, the senior executive leader of the team responsible for the financial advice industry, for the task of defending ASIC. Macaulay didn’t cover herself or ASIC in glory when her answers revealed a slow, hesitant, reluctant regulator that chose compromise rather than wielding the big stick.

  The statistics presented at the hearing were damning of ASIC. In the previous five years the regulator had not instigated any civil penalty proceedings against a financial adviser; in the previous decade it had criminally prosecuted just one holder of an Australian Financial Services Licence (AFSL); and it had never prosecuted a licensee for failing to comply with the ten-day time limit for reporting a breach. Even more shocking were the revelations that ASIC investigated less than half of ‘significant’ breach reports filed by licensees, and the average time that elapsed between a member of the public making a complaint about poor financial advice and ASIC reaching a decision about how to act on the complaint was almost two years.

  Then there were the enforceable undertakings that were entered into with licensees. Rowena Orr asked Macaulay about enforceable undertakings ASIC had entered into with ANZ and CBA in respect of the fees-for-no-service issue. ‘$3 million from each [ANZ and CBA] to mark the level of misconduct. How did ASIC determine that $3 million was an appropriate figure for those community benefit payments?’

  Macaulay replied, ‘I can’t say how that figure was fixed and reached.’

  Orr asked, ‘Do you think those figures were adequate, given the size of those two organisations and the seriousness of the conduct that was the subject of the enforceable undertaking?’

  Macaulay responded, ‘Well, certainly when you look at the balance sheet of those institutions it’s enormous. So $3 million is not a large amount of money at all.’

  She was right. In 2018, CBA earned just under $10 billion and ANZ raked in $6.4 billion in profits over the same period.

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  The royal commission had laid bare the entrails of the financial planning industry and shown that a weak regulator had allowed it to flourish. By this time the Coalition government was looking for positive ways to share in the headlines. The best way to do that was to talk about jail terms for the blue bloods.

  Treasurer Scott Morrison announced new criminal penalties of up to ten years’ jail and maximum fines of $945,000 for individuals breaching the Corporations Act 2001. Civil penalties would increase tenfold, with maximum fines of either $1.05 million for individuals or $10.5 million for corporations, or three times the benefit gained or loss avoided, or 10 per cent of annual turnover – again, whichever was largest. In reference to AMP’s revelations, including lying to the regulator, Morrison warned ‘this type of despicable behaviour does carry jail sentences under the Corporations Act’.2

  The Coalition was forced to eat humble pie. Turnbull said he was shocked by the revelations and admitted it was a ‘clear political error’ not to call the royal commission earlier.3

  Barnaby Joyce, speaking from the backbench after his extra-marital affair, joined the chorus and tweeted, ‘In the past I argued against a royal commission into banking. I was wrong. What I have heard so far is beyond disturbing.’4 Former Prime Minister Tony Abbott chose to shift the blame to ASIC. One Nation leader, Pauline Hanson, demanded the banks be forced to repay the costs of the royal commission, ‘no questions asked’. Labor’s Bill Shorten went a step further and said the royal commission needed to be extended. In a letter to Prime Minister Turnbull, he said, ‘In just fourteen days of hearings the public had heard shocking and shameful evidence about systemic wrongdoing and a culture of cover-up in the banking industry . . . Consideration of extending the Royal Commission’s reporting time, of an associated compensation scheme for victims, and giving an apology to victims is the least the Government can do given it dragged its feet for so long in acting on the scandals plaguing the banking and financial services sector.’5 Not surprisingly, given the thousands of victims lodging submissions and the complexity and size of the industry, questions about the timing of the royal commission would become a recurring theme.

  Chapter 18

  Round 3: Small-business loans

  The banks dodge a bullet

  ‘I’M AS BLIND AS a bat, I had cancer and I have been used.’

  So announced Carolyn Flanagan, a sixty-seven-year-old woman on a disability pension, who appeared as a witness during the third round of the royal commission’s hearings in Melbourne. Beginning on 21 May 2018, these hearings would deal with loans to small and medium enterprises.

  Everyone watching had a good idea of what would emerge when Flanagan entered the witness box to testify about a risky guarantor bank loan she’d taken out on behalf of her daughter. A pattern had already emerged in the first two hearings of bank customers being regularly shafted and always coming a distant second to profits.

  Flanagan’s story would be a variation on an old theme and would raise fears that the royal commission might recommend regulation that made it harder for guarantors, including parents, to underwrite business loans for family members. Westpac, in particular, argued that such a move would cut off a key supply of small-business credit to the detriment of the economy.

  Small businesses are big business for the banks. Around the country, 2.2 million small businesses employ about fi
ve million people. A portion of small businesses are farms, which face the additional challenges of the weather and big supermarkets squeezing them. The big four banks are their main source of credit. Farms are the economic lifeblood of the nation and each year the banks lend them billions of dollars. Investors and bankers were very concerned about this round of the royal commission because of the amounts of money involved and the potential impact on profit – and shares – if laws were changed to make it more difficult to lend to small businesses.

  Michael Hodge had a shopping list of complaints against the banks in relation to small business. It included some familiar items: the sale of fraudulent loans, the sale of inappropriate loans for financial incentives, failure to notify ASIC of breaches, charging fees for services not provided, accepting incorrect and incomplete loan applications, double-charging interest on business overdrafts, and overcharging interest.

  In its submission to the royal commission, ANZ had admitted that two business bankers had colluded with third parties to write forty-seven fraudulent loans. CBA had charged thousands of businesses double the interest they were supposed to be paying on business transactions and overdraft accounts then failed to report the breach to ASIC or its clients – and it was two and a half years before customers were notified about the breach and repaid the money. NAB had confessed to incorrect disclosure of interest rates and incorrect calculation of interest, resulting in incidents where clients were being overcharged.

  With the scene set, Flanagan was beamed into the courtroom via a videolink from Sydney, after her doctor had said she was too sick to travel to Melbourne. Flanagan explained that she had agreed to help her daughter to obtain a loan of $160,000 from Westpac to buy a pool-maintenance franchise in western Sydney, and had offered her house as security.