At that time, CBA was already aware of the issues relating to the AUSTRAC inquiry, fees for no service and mis-selling consumer credit insurance. ‘But those failings weren’t yet known to the public at the time that the remuneration report was released in August 2016?’ Orr asked.
Livingstone gave a monosyllabic response: ‘Yes.’
Orr then presented a remuneration report, which included a reference to ‘concerns raised in the media about CommInsure’. But the report didn’t mention any of the other issues identified by the bank. ‘Was it CBA’s approach at this time to wait until a risk had eventuated publicly before imposing any sort of consequence for failing to manage that risk?’ Orr asked.
‘I don’t believe that was the intention, but it might be the impression created,’ Livingstone replied.
When Orr asked Livingstone what message Spring’s reduced bonus sent, Livingstone responded, ‘There will only be consequence if there is a public event, a media event.’
It wasn’t until shareholders took a stand and voted against CBA’s remuneration report at the November 2016 annual general meeting that Livingstone, who became chair in January 2017, was forced to rethink the bank’s policy. In the 2017 financial year, in the wake of the AUSTRAC scandal, Livingstone requested executives and directors – some of whom had left – to take a 20 per cent fee cut. All agreed, except for former chairman David Turner, who was asked to give back 40 per cent of his fee. He declined and Livingstone never bothered to chase him for the refund.
The questioning of Livingstone continued as Orr turned to the decision to promote Matt Comyn as CEO. ‘I want to ask you,’ she said, ‘about the sort of message that you think it sent to others within CBA and to the broader community to promote the person who was in charge of the division in which all of those issues occurred?’
Livingstone replied, ‘The easy answer for us would have been to appoint an external person. To find an external person globally at that level who hasn’t been involved in some regulatory event is almost impossible.’ This provoked an outbreak of laughter in the courtroom, to which she snapped back, in a school-marm voice, ‘And I don’t mean that as a joke.’
Livingstone’s appearance in the witness box demonstrated that a warped and self-serving culture reigned at CBA and in the financial sector more widely. Orr had exposed serious flaws in the board, the committees and the follow-up to serious risk and compliance issues at CBA. Yet it was clear that Livingstone and other CBA board members had felt no compunction or responsibility to look into the bank’s operations and the well-founded claims of endemic and systemic malpractice.
In a parting query, Orr asked Livingstone what she hoped to achieve five years from now.
‘Well, [that] the CBA – and hopefully in less than five years – is one that customers trust and the community trusts,’ she replied, ‘and that we’re delivering the products that really fit our purpose, which is for the financial wellbeing of – of our customers.’
On that note Livingstone took her battered pride and walked out into a windy day in Sydney to return to the safe sinecure of her office.
*
After Livingstone left, the courtroom emptied and crowds gathered in the foyer, gossiping about her performance. I headed to a pub down the street with Natasha (Tasha) Keys, a single mother who’d been battling CBA for seven years. We had organised to meet days earlier when she’d sent me a series of documents.
Keys’ troubles had begun in 2009 after she divorced her partner and applied to CBA for a loan to buy a picturesque tea tree farm called Tanglewood, in the Northern Rivers area of New South Wales. A trained scientist with a passion for the land, Keys believed she could turn the tea-tree farm into a thriving commercial enterprise on the back of a rising demand for organic oils worldwide.
CBA had known of Keys’ financial situation when she took the loan, yet the bank had agreed to sign off on a credit card to help pay the bills. But shortly after she bought the farm the area was hit with a severe flood, which damaged the property and virtually wiped out the harvest.
As her financial situation worsened, Keys applied for hardship assistance but was knocked back by CBA. ‘If I wasn’t able to harvest due to flooding, that was my problem and I had to deal with it,’ she said.
By 2010 she was working three jobs to stay afloat. ‘I would end up crying from exhaustion . . . [I’d go] from one job to the next, rush back, pick up my daughter, cook dinner then drive to the farm to try and do some work there,’ she recalls.
In February 2010, CBA got serious and filed a statement of claim against Keys in relation to the credit card debt. CBA told her if she didn’t pay $110 per week it would take her to court. CBA also put pressure on her regarding the repayments on her other loan.
Keys didn’t realise it at the time, but the bank had misclassified her loan. She should have been given a farm loan, tailored to farmers, with payment moratoriums and interest rate reductions, debt relief and provision of specialist agricultural business banking support. It also hadn’t offered her farm debt mediation, which was mandatory in NSW.
In August 2011, without notice, CBA took possession of Keys’ farm. Keys then lodged a complaint with the FOS asking for help on the basis that she was a single mother, had no credit rating left, no car, the bank had seized her property and she was living in her mother’s garage with her daughter.
Keys also wrote to CBA, saying, ‘I am writing to you as a matter of urgency . . . Since the bank has locked my property I have been unable to access the property. The house is situated over 1km to the rear of a 100-acre property. The property must be maintained to reduce the chance of major issues . . . I am pleading with the bank to hand back my property . . . to reduce further financial pressure on me whilst the matter is being resolved by the FOS . . .’
It took CBA two years before it listed the property for sale. During that time, it went from being a well-maintained, attractive tea-tree farm to a run-down, ramshackle property that had been broken into and was dank from the elements. It sold for $165,000, less than half its valuation before it was left to rot.
Keys decided to take legal action, alleging the bank had breached its duty of care by failing to obtain two independent valuations. She also alleged CBA should have offered mediation before seizing her property.
In May 2018, Jeff Morris heard about Keys’ case and decided to help. He could see she was out of her depth against CBA’s battalion of barristers and lawyers. Morris mentioned the case to Matt Comyn – who was familiar with it, as Keys had written to him.
At the time Keys and I had our beer, she was hoping to reach a settlement. (Weeks later an offer appeared, which she accepted.) After our chat, we strolled up the road to have dinner at a cheap Italian restaurant. When we arrived, Morris was sitting with at least ten bank victims. It felt surreal as, one by one, they asked if they could tell me their story. During the course of the evening I heard a lot of heart-wrenching tales. Some of these people had been fighting the banks for years. Some had been suicidal, others had suffered divorce, lost their businesses or their homes.
These were the human faces of bad banking. They were the collateral damage of a system that had allowed banks to bully customers in the shadows. They were the forgotten people who had lodged submissions in the hope they would get to tell their stories to the royal commission. They didn’t stand a chance. Only twenty-seven out of more than ten thousand were given that opportunity.
Chapter 24
Round 7: Westpac
Agreeing to disagree
WHEN WESTPAC BOSS BRIAN Hartzer arrived in the witness box just before 2 pm on 21 November, he had an air of confidence lacking in the other chief executives who had so far appeared at the royal commission. Hartzer had been running Westpac since 2015, after being promoted from its financial services division, home to its problematic financial planning business.
Michael Hodge QC had been assigned to the cross-examination. His aim was to highlight misconduct, examine how the bank h
ad dealt with it, and look at what it was doing to change. Although Westpac had emerged relatively unscathed from the early rounds of the royal commission, Hodge was about to show it was no cleanskin.
Hodge opened with Westpac’s response to a request by ASIC in 2012 for all banks to start properly assessing the financial capabilities of customers before offering credit card limit increases. In 2014, it became clear to ASIC that Westpac, unlike the other banks, had failed to amend its processes. It would take Westpac until March 2015 to comply with ASIC, and led to a penalty of $1 million.
Hodge asked Hartzer to comment on why ASIC was ignored.
‘It’s kind of moot because credit limit increase offers have ceased altogether,’ he said to Hodge. ‘I haven’t spent a lot of time thinking about it, because we stopped doing it.’ He did, however, concede that Westpac should have been more proactive about resolving those issues: ‘I think there was clearly a deficiency in understanding the seriousness with which regulatory disagreements needed to be dealt with.’ Hartzer insisted that a serious disagreement with the regulator would now be pushed to the top levels of management.
Having failed to land a glove on Hartzer, Hodge moved on to a more sensitive topic: why Westpac was retaining its financial advice business when the other banks were selling theirs off after accepting that they resulted in conflicts of interest. Hodge cited two issues that appeared to be endemic across the large financial advice businesses: poor or non-compliant advice and the charging of fees for no service.
Westpac has a significant wealth-advice business, BT Financial Group, which directly employs financial advisers and operates two authorised representatives, Securitor Financial and Magnitude, which operate under the BT licence. Their advisers aren’t directly employed by BT, but if things go wrong, BT is responsible for remediating customers. It’s a similar arrangement to the one between CBA and Financial Wisdom.
Hodge referred to an audit in late 2017 which showed that only six out of ten Westpac financial advice files passed a compliance audit. ‘Outcomes from recent file audits . . . are showing results at a level that does not indicate a sufficiently robust control environment to comply with ASIC’s expectations,’ the audit said.
Fees for no service had been identified as an issue at Westpac in January 2016, but it took the bank until December 2017 to commence remediation payments to victims of this malpractice. The commission heard that Westpac had set aside $117 million for compensation, but the bank’s records were so poor that Hartzer still couldn’t give an estimate of its total exposure. He admitted that some of the fees went back eleven years and that Westpac had not yet calculated the remediation payments that needed to be paid on behalf of its authorised representatives – financial advisers who aren’t directly employed by Westpac but operate under its licence. He estimated those representatives had received $991 million in ongoing advice fees over the previous decade, but he didn’t know how much of that represented fees for no service.
In other words, Westpac’s advice business was much like that of the other banks. Systems were old, record-keeping poor, compliance processes questionable and remediation too slow. Nevertheless, Hartzer wanted to maintain the status quo. This was made abundantly clear when Hodge read out some of Westpac’s objections to industry reforms that had been proposed in the royal commission’s interim report. As an example, he asked if Westpac was against ‘requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements’?
Hartzer agreed that it was.
‘It opposes structural separation between product manufacturers and advisers?’
Hartzer agreed.
‘It opposes a ban on trail commissions for intermediaries?’ Hartzer agreed.
‘It opposes a ban on introducer programs?’
Hartzer agreed.
‘It opposes industry codes being given legal or further legal effect?’
Hartzer agreed.
To provoke a different response, Hodge asked, ‘And do you think that one of the reasons that Westpac opposes each of those changes is because there will be an effect on the profitability of Westpac’s business?’
‘That’s a component of it,’ Hartzer conceded, ‘but that’s not the main driver. The way you described that sounds like we’re completely opposed to change, which we’re not.’
But it was too late. Hartzer’s responses had made it clear that Westpac would only modify its procedures if it was forced to.
*
As at other bank AGMs held in late 2018, the company’s investors registered a massive protest vote, with 64 per cent of shareholders rejecting Westpac’s remuneration report – one of the highest votes recorded against a Top 50 company on record. There was also a big vote against the granting of shares to Hartzer and the re-election of a former AMP boss, Craig Dunn, to the Westpac board. Investors were unimpressed that executives had only been docked an average of 25 per cent of their bonuses. Hartzer’s total remuneration in 2018 dropped almost 10 per cent to $4.9 million.
Due to time constraints, Westpac chairman Lindsay Maxsted wasn’t called as a witness. However, he gave an insight into his thinking in his December 2018 address to shareholders, saying that Hayne’s summation of banks being greedy didn’t apply to Westpac. ‘We are not an organisation based on greed or short-term profit,’ he claimed, adding that much of the conduct aired during the royal commission had been ‘historical, has been previously reported to regulators, and in many cases, had been resolved or is being addressed’.
Despite all that had been said at the royal commission, Westpac still didn’t get it.
Chapter 25
Round 7: ASIC and APRA
Regulatory twin peaks
ASIC’s CHAIRMAN, JAMES SHIPTON, had put a lot of thought into his appearance at round seven of the royal commission. He had taken on the role of chairman just ten months earlier and was under no illusion that the corporate regulator was seen as anything but a toothless tiger. The interim report had made it clear that the royal commission held a bleak view of ASIC’s weakness as an enforcement agency and believed it was too close to the companies it was supposed to be regulating. ‘When misconduct was revealed, it either went unpunished [by the regulators] or the consequences [imposed by the regulators] did not meet the seriousness of what had been done,’ Hayne had written.
It was a damning indictment. Likewise Hayne’s comments that ASIC’s negotiated outcomes with entities had ‘taken far too long’, including many cases where remediation programs had taken ‘months, even years, to formulate and implement’. Hayne also expressed the view that the way ASIC had dealt with financial institutions would have allowed the institutions to think that ‘they, not ASIC, not the Parliament, not the courts’ could decide when and how the law would be obeyed or how the consequences of breaches would be remedied. ‘A regulator “speaking softly” will rarely be effective unless the regulator also carries a big stick,’ Hayne wrote.
The clear implication was that Shipton needed to find a big stick and make some tough choices, including distancing himself from ASIC’s sins of the past by shifting the blame to his predecessor Greg Medcraft and castigating staff caught brokering cosy deals with regulated entities, such as letting the banks vet draft media releases.
By the time Shipton sat down in the witness box on 22 November, the courtroom had filled with bank victims, whistleblowers, academics and his ASIC entourage. Shipton was nervous. Treasury, politicians, ASIC staff and other decision makers would be watching. The royal commission was the ideal place for him to set a new tone.
Rowena Orr wanted to explore why ASIC was a reluctant regulator. She began by asking about ASIC’s budget and its remit, which was wider than most of its regulatory counterparts overseas. Orr wanted to find out whether a restrictive budget was impeding its performance. Shipton confidently made it clear it was: ‘It means . . . we are constrained in probably every aspect of our regulatory work. Certainly in investigations, certainly in other matters relating to enforcem
ent, but I would also make the case that we are constrained in our surveillance, our supervision, our important work on financial capability, and – and other work that we undertake.’ Over the years ASIC’s responsibilities had expanded and its budget had been cut by the government in some years, but these weren’t the only reasons for its disappointing track record.
Orr then turned to ASIC’s stakeholder engagement strategy, which listed regulator meetings with boards and senior executives of the big financial institutions. Orr quoted from the document: ‘It provides an opportunity to exchange information and discuss issues directly with the leadership of these organisations. It enables ASIC to hear directly from our stakeholders about any issues or concerns and to receive updates on new developments in the institution. It also allows ASIC to provide direct feedback to those involved in overseeing these institutions about compliance and/or enforcement issues we are seeing in their organisation. In many cases, boards would not otherwise have an opportunity to hear this feedback directly.’
Shipton supported the strategy of engagement, saying he spoke relatively frequently with these big financial institutions. He gave examples of discussions he had held with Matt Comyn as well as phone calls and personal correspondence and meetings with the bank boards.
Orr wanted to highlight the danger of regular personal contact with boards and executives given the commissioners were the same people responsible for making decisions about enforcement action: ‘Do you think, Mr Shipton, that there are any risks associated with frequent personal contact between regulators and the leaders of the entities that they regulate?’
Shipton said he exercised professional judgement during the meetings. Orr challenged him on that, asking, ‘It’s part of human nature, isn’t it, Mr Shipton, that when we have a relationship with someone, it’s usually harder for us to do something that might harm that person’s interests?’
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