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On Friday, 1 February 2019, the imperturbable Kenneth Hayne put on a dark grey suit and flew to Canberra to deliver his report to Governor-General Peter Cosgrove. As a matter of courtesy, he had agreed to meet the Treasurer Josh Frydenberg for a private briefing at which he would present him with a copy of the report.
Frydenberg invited the media to attend, and come the meeting he was beaming from ear to ear, thinking he’d got one up on the federal opposition. But Hayne is a stickler for protocol, and Frydenberg’s media circus wasn’t part of the deal.
‘Can we please get a handshake?’ a photographer asked Hayne.
‘Nope,’ he replied.
‘Can we maybe get you just shifting [the report] to him?’ another photographer asked.
Hayne shook his head vigorously from side to side. This was someone not used to being told what to do, and his silence spoke volumes. As Hayne frowned and Frydenberg’s smile froze, the PR stunt became a train wreck, the awkward exchange captured on video and in photos and quickly going viral across all media platforms.
The theatrics added to the growing excitement, and the countdown began for the public release of the report at 4.20 pm on Monday, 4 February. Having got their hands on it early, Frydenberg and Scott Morrison decided to exploit this advantage over the opposition and use the weekend to review its contents and compile a response. With both sides of federal politics in pre-election mode, the government needed every advantage it could gain, especially as it had resisted a royal commission for so long.
A select group of powerful public servants – including representatives of ASIC, APRA and Treasury – were also given special access to Hayne’s final report that weekend, under strict embargo. There had been considerable chatter in those circles that the final report would contain no surprises, and this intelligence proved correct. Every recommendation had been accurately anticipated by Treasury, even Hayne’s recommendation to end commissions in the mortgage-broking industry.
Hayne’s final report included a recommendation for an immediate capability review into APRA. During the weekend, Graeme Samuel received a call from the government asking him to consider heading a root-and-branch review of APRA, similar to the capability review that ASIC’s Karen Chester had conducted back in 2015. By the time the media and some other interested parties, including the Australian Banking Association, had assembled at Parliament House to read the final report on Monday afternoon, Samuel had accepted the role, and it had been included in Frydenberg’s detailed response to Hayne’s recommendations.
Chapter 30
The final report
Day of reckoning
WHEN I FLEW INTO an unusually hot and sticky Canberra for the media lockup to read the final report of the royal commission before its formal release, the corridors of the press gallery were buzzing as journalists speculated one last time what might lie within. There was a general air of expectation that Hayne would recommend some corporate scalps for criminal misconduct. I wasn’t so confident that this would be the case.
At 12.45 pm a group of journalists headed into the lockup. Those from the Sydney Morning Herald, The Age and the Financial Review were allocated room 1R3, one of a number of windowless committee rooms located in the House of Representatives. Security was tight. We had to provide photo ID and sign a witness form agreeing to the terms and conditions, including not being allowed to leave before the report was made public. We also had to hand over our mobile phones and smart watches and disable the connectivity of our laptops to ensure nothing was transmitted, broadcast or published until the embargo was lifted. Anyone who needed to go to the bathroom had to be escorted by security.
At 1 pm, we were finally given the report. We had only a little over three hours to read it and consider the government’s response, so the atmosphere in our airless room was charged. As we scrutinised the seventy-six recommendations, my heart sank. It was soon clear that Hayne’s report had failed to address the systemic issues that had got the banks into trouble in the first place. Despite the royal commission’s scathing assessment of a sector that had presided over institutionalised theft of customer money on an industrial scale, it baulked at enforcing major structural reform of the banks or regulators. For the most part, Hayne had decided to keep things as they were. It meant there would be no new financial services regulator, no recommendation for financial services giants to dismantle their vertically integrated models, no radical changes to superannuation, and no changes to responsible lending laws or small-business lending.
Overall, the final outcome was disappointing.
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In hindsight, Hayne’s report was never going to upset the status quo. Hayne was and is a member of the Melbourne establishment. He’d been carefully handpicked by Malcolm Turnbull. The Commonwealth Treasury, a conservative and powerful organ, had also backed Hayne as the best person to lead the inquiry; he had a good reputation, a good brain and was a safe pair of hands. Turnbull and Treasury had just wanted to plug the holes in a leaking boat, nothing more.
Hayne had agreed to the government’s strict budget, tight terms of reference and short twelve-month time frame. That was far less time than it took to complete the royal commissions into trade unions, which ran for eighteen months, and Institutional Responses to Child Sexual Abuse, which ran for five years. Over the course of the hearings, there were numerous calls for Hayne to request an extension to the royal commission, but he refused point blank, citing risks to the economy, as he noted in his final report: ‘I must execute those tasks conscious of the fact that the banking system is a central artery in the body of the economy. Defects and obstructions in the artery can have very large effects. Likewise, prolonged injections of doubt and uncertainty can affect performance.’
These comments provided a profound insight into Hayne’s way of thinking. It showed that he wasn’t prepared to do anything that might create doubt or uncertainty in the financial system, even if that meant allowing some important areas to escape scrutiny. It meant he didn’t have enough time to call up several executives and directors, such as CBA’s former CEO Ian Narev, ex-head of wealth Annabel Spring and former chairman David Turner; AMP’s former chair Catherine Brenner and former CEO Craig Meller; and the chairs of Westpac or ANZ. Nor did he have time to investigate the Macquarie Group or call up the former chairman of ASIC Greg Medcraft. Some financial services companies escaped scrutiny altogether. Pay-day lenders were not examined, nor were buy-now-pay-later businesses such as Afterpay. There was no time to discuss bank remediation programs or forensically examine the crucial $2.7 trillion superannuation industry, including the $700 billion self-managed super fund sector, which is opaque and has its own set of challenges.
Hayne’s refusal to extend the deadline also meant the royal commission had failed to give the many thousands of victims of banking malpractice who had lodged submissions an opportunity to tell their stories in a legally protected forum. The twenty-seven victims who did get the chance to speak publicly were chosen, according to Hayne, as being ‘reasonably illustrative of kinds of conduct and general issues’ emerging from the commission, but he conceded in his report that ‘the choices that were made will have disappointed those not chosen’.
Partly to save time, Hayne had left it to the industry to provide details of its misconduct, instead of serving subpoenas to key players, which would have demonstrated a tougher stance. His trust in the financial institutions to do the right thing seemed misplaced, given that it was a sector that had grown fat on dishonesty, and it meant some scandals, either by accident or design, were left off the institutions’ lists, and remained unexamined.
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So perhaps it wasn’t surprising that the final report focussed on easy targets. Hayne’s most controversial recommendation was aimed at the mortgage-broking sector, which arranges more than half of all new home loans. Hayne proposed a ban on all upfront commissions and trailing commissions on new loans and suggested that customers should pay mortgage brokers
an upfront fee instead. When I read that recommendation, I was surprised because it was a plan that would penalise mortgage brokers and benefit the banks. Customers would most likely go straight to the banks to obtain their loans in order to avoid paying the fee, and the banks would save an estimated $2.4 billion a year they were currently paying brokers in commissions. It seemed odd that Hayne hadn’t recommended that the banks should pay the fee, instead of the customer.
Vertical integration had been a root cause of misconduct, but Hayne decided it was too difficult to tackle. ‘Ultimately, whether there should be a separation between the manufacture or sale of financial products and the provision of financial advice will depend on whether the benefits of such a separation would outweigh the costs.’ While agreeing that separation would reduce conflicts, Hayne said it would ‘involve significant disruption to that industry, and the financial services industry more broadly’. This conclusion ignored the overwhelming evidence that conflicts can’t be controlled, and there was no better illustration of this than a report on vertical integration compiled by ASIC in January 2018, which found that 75 per cent of the customer arrangements it reviewed from the big four banks and AMP were not in the best interests of clients.1
On many fronts, Hayne’s views were consistent with those of Treasury, and he had certainly heeded the warnings Treasury had made in its various submissions, briefings and background papers that anything that might negatively impact credit could harm the economy. For example, he refrained from imposing restrictions on mortgage lending and small-business lending, despite the conflicts in these areas revealed in the royal commission, including introducer programs and staff referral bonuses, and the apparent flaws in establishing realistic benchmarks for assessing household expenses and income, which had helped fuel the property boom.
*
The royal commission had spent a year hearing about the many ways in which government regulators had failed in their duty to regulate the financial services industry. Hayne’s solution was to give them more powers and more work in the hope that they would start to do their job more efficiently. Again, that was placing a lot of faith in institutions that had previously let down the public.
He did, however, include one firm caveat: ‘Although I do not now recommend the establishment of a specialist civil enforcement agency, ASIC’s progress in reforming its enforcement function should be closely monitored. If, over the coming years, it becomes apparent that ASIC is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability, further consideration should be given to developing a specialist agency.’
In other words, if ASIC continued to play the timid cop, it should be stripped of its enforcement powers. It was a great pity that Hayne hadn’t recommended a similar structural remedy for financial institutions who failed to change their ways.
*
In his interim report, Hayne had asked some tough questions about the use of financial incentives, including big salaries, bonuses and targets, to drive business. But despite spending so much time over the previous year discussing greed and the lack of will on the part of boards to cut executive bonuses in the face of scandals, his solution was to leave it to the remuneration committees of those boards to continue to consider misconduct and compliance when setting bonuses, and for APRA to take a more active role in supervising the implementation of remuneration frameworks by the entities it regulates. In other words, little change.
When it came to the use of targets and bonuses to motivate front-line staff, Hayne also went soft, recommending only an annual review of procedures and systems. Although he wrote in his report that ‘culture, governance and remuneration march together’, he nevertheless left it up to the institutions to address this. ‘Making improvements in each area is the responsibility of financial services entities,’ he said. It was a common and disappointing refrain of the report.
Hayne tried to appear tough on financial advisers, calling for a ban on grandfathered commissions, but he was preaching to the converted, as the big four banks had already taken steps to reduce or eliminate such payments.
*
Over many decades hundreds of thousands of customers – possibly millions – have been ripped off by shonky financial advisers, dodgy financial and insurance products or the fees-for-no-service rort. Farmers have lost their farms, small businesses have gone belly-up, and individuals have been financially destroyed. Consequently, many observers hoped a royal commission into financial misconduct would address compensation and remediation for these victims.
Leading banking analyst Brett Le Mesurier gave me an estimate of at least $10 billion due to be paid out by the big four banks and AMP in consumer refunds, reviews and litigation. CBA, which has been embroiled in the most scandals in recent years, is expected to have the highest remediation payout at $3 billion, including its $700 million AUSTRAC fine. There is, however, little transparency about how this money will be repaid by the financial institutions, or when.
Though the royal commission was supposed to be for the benefit of the people, the report barely mentioned remediation. Hayne proposed a compensation scheme of last resort, but little else. That meant the various compensation schemes set up by the banks over the previous few years wouldn’t be scrutinised to ensure they were assessing people fairly and paying out promptly.
Nor did Hayne look at whether victims of misconduct should also be compensated for their pain and suffering. The royal commission had received numerous submissions from farmers who had been kicked off their land after generations of farming and suffered not just financial devastation but mental anguish, exacerbated by aggressive attempts by the banks to claim repayment.
It was a missed opportunity, another glaring omission.
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The most startling part of the report was Hayne’s dressing-down of NAB executives Ken Henry and Andrew Thorburn. As well as singling them out for a public shaming, Hayne noted that, with regard to the behaviour of its most senior executives, ‘NAB stands apart from the other three major banks’. He was ‘persuaded that Mr Comyn, CEO of CBA, is well aware of the size and nature of the tasks that lie ahead of CBA’. He was also positive about Shayne Elliott’s commitment to the tasks ‘that lie ahead of ANZ’. And although Westpac had taken a combative approach to ASIC, Hayne said he did not doubt that Brian Hartzer ‘has sought to “reset” [Westpac’s] relationship with ASIC’.
NAB was a different story. ‘Having heard from the CEO, Mr Thorburn, and the chair, Dr Henry, I am not as confident as I would wish to be that the lessons of the past have been learned . . . Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains.’
He made his disapproval of Henry obvious: ‘I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the [NAB] board had dealt with some issues.’ He also condemned Thorburn, writing, ‘I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and NULIS on this account is likely to be more than $100 million.’
The commissioner’s censure of Thorburn and Henry sealed the fate of both men. At the same time, Hayne was sending an important message to directors and senior management at other institutions that they were on notice and that their words played a fundamental role in setting the culture of their organisations.
Hayne’s comments about Henry and Thorburn triggered a frenzy of media speculation about their futures. The day after the report was released, Thorburn decided to cancel his long service leave and try to repair the damage. The bank drafted a joint media statement, to be lodged with the ASX in time for the market’s opening on Tuesday, 5 February. In it Thorburn said, ‘As the CEO, this is very hard to read, and does not reflect who I am or how I am leading, nor the change that is occurring inside our bank . . . While we have made mistakes, I believe t
here is a lot of evidence that we are making sustainable and serious change to once again regain the trust of all our customers.’2 Like Thorburn, Henry found it difficult to accept Hayne’s criticism, saying, ‘I am disappointed that the Commissioner formed this view. I know that it is not so. The board and I have reflected deeply on those and other issues and, as I have said previously, we take them very seriously.’
By Thursday, 7 February, as calls for Thorburn’s and Henry’s heads reached fever pitch, both men were in constant contact with the board about their positions. Eventually a decision was reached, and they agreed it was time to go. At 3.35 pm, NAB’s shares were placed in a temporary trading halt pending an announcement. To those of us in the media, it was obvious the halt related to leadership changes. Speculation was rife it would be Thorburn or Henry, but not both.
At 5.14 pm a three-page statement was lodged with the ASX confirming that both men had resigned. New Zealand-born NAB director Philip Chronican, a former executive from ANZ and Westpac who’d missed out on the top job at both banks, would step in as chairman of NAB and acting CEO until a replacement was found.
The royal commission had turned Thorburn’s and Henry’s lives upside down. Thorburn’s wallet took a battering too. He was granted a $1.04 million severance pay, but the NAB board cancelled his performance rights, which were estimated to have been worth $22 million.
Banking Bad Page 33