Australia urged to tackle errant banking practices

Chief executive Andrew Thorburn apologises to National Australia Bank's customers as shareholders across Australia call on the corporate regulator to get tough on errant behaviour at the banks.

The chief executive of National Australia Bank, Andrew Thorburn, has apologised to customers for putting profits before people and using incentive payments to reward bankers for questionable sales tactics.

Thorburn made the statement to a government standing committee on economics last Thursday in the wake of a fees-for-no-services scandal that has gripped the bank for months.

“In so many cases we have not had the care and respect for our customers that we should have,” said Thorburn. “If there was ever a need to step back, reflect and to act differently, it is now.”

The apology comes in the wake of lapses in corporate governance and a systematic disregard for the rules that have allowed large companies, particularly banks and insurance firms, to operate with impunity.

The tawdry behaviour is being exposed at a royal commission – a formal Australian public enquiry with quasi-judicial powers – into misconduct in the financial services industry, which is hearing damning evidence of malpractice against AMP, Westpac, National Australia Bank, Commonwealth Bank of Australia and ANZ.

The firms have been caught switching customers into expensive, poorly performing products, using coercive sales tactics, and charging ongoing fees when no service is being provided or after a person has died. They have steadily increased insurance premiums and then refused to pay out on legitimate claims.

And when these companies have been called out by regulators for contravening the law they have carried on regardless, driven by internal reward systems focused on short-term profits.

Louise Davidson, who heads the Australian Council of Superannuation Investors (ACSI) – an industry body representing 38 asset owners that collectively manage more than A$2.2 trillion (US$1.6 trillion) – said the events of the past six month have led to a serious loss of public trust in business. “Some parts of corporate Australia have clearly lost sight of the expectations of communities and investors,” Davidson told FinanceAsia.

ACSI and other organisations such as the Australian Shareholders Association (ASA) are calling for a widespread change in corporate culture and a resetting of moral compasses.

“The days of the shareholder primacy model, where wealth is appropriated from other people in order to hit targets, is over,” Judith Fox, chief executive at ASA, said. “Shareholders are not indifferent to how profits are generated.”

Fox said she is horrified when company executives justify their wrongdoing by saying they did it for the benefit of shareholders. “We don’t want our companies to behave egregiously,” she said, in an interview with FinanceAsia. “It is not good for customers, employees and suppliers, and it is not good for the long-term sustainability of returns.”


The royal commission will run until the end of the year and is due to hand down an interim report in late September. The report is expected to detail widespread failings by the two regulators charged with overseeing the sector – the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA).

ASIC in particular, which administers the Corporations Act, is likely to be portrayed as reticent and ineffective. There is little doubt it is afraid to litigate against large firms.

Research into enforcement trends conducted by the University of Melbourne last year found that only 11% of ASIC’s total outcomes in the five years to June 2016 were criminal in nature, and a vast majority of these were against small businesses.

FinanceAsia’s own analysis of data released by ASIC in August shows 183 criminal actions were taken against small operators in the first six months of 2018, compared with only two against financial institutions. And one of those is under appeal.

The ability of large companies to throw money at court cases means ASIC has preferred to negotiate with big businesses, issuing enforceable undertakings and banning orders. The problem is, it doesn’t follow up when orders are disregarded – as demonstrated in the royal commission hearings when AMP admitted to ignoring breach notices 20 times.

Observers say it has been too easy for company executives to take advantage of a lack of clarity in ASIC’s enforcement framework. For example, the rules require that possible breaches of the Corporations Act must be reported to ASIC within 10 days, but the framework doesn’t specify when these 10 days start. Companies have used the loophole to run inquiries through a multitude of committees before contacting the watchdog.

Offending institutions have also had leeway to interfere in ASIC’s processes. When the regulator asked AMP to commission an independent report into a fees-for-no-service scandal, the resulting document underwent more than two dozen draft rewrites. AMP is alleged to have told the report writers at law firm Clayton Utz to indicate that its chief executive had not known about the illegality of the fee practices.

Andy Schmulow, a senior lecturer in law at the University of Wollongong, said the ability for big companies to manipulate ASIC and manage their responses to breach notices has made a farce of the regulator.

Schmulow believes things started to go wrong for corporate Australia in 1998 when the Wallis Inquiry recommended taking away regulatory power for consumer protection and market conduct from the Australian Competition and Consumer Commission (ACCC) and handing it to ASIC. “The ACCC has a much better track record at flexing its legal muscle and holding errant executives to account,” Schmulow said in an interview with FinanceAsia, pointing to the recent arrest of six of the country’s most senior bankers.

In June the ACCC served the bankers with criminal cartel charges in relation to a A$2.5 billion capital raising for ANZ in 2015. The accused include the former country heads of Citigroup, Stephen Roberts, and Deutsche Bank, Michael Ormaechea. If found guilty they could each face jail sentences of up to 10 years.

Schmulow said ASIC’s role as an enforcer is confused by its dual function as a company registry. “As the purveyor of the country’s database of registered companies, ASIC is under the impression that it has to facilitate business,” he said. The database generates about A$720 million a year in fees for the government, making it a significant earner.

Judith Fox, ASA

Over the years the government has conducted several market testings to privatise the registry but has so far decided against it. The last tender process was run in February and found the registry’s technology to be too outmoded to attract private investors.

Another common complaint is that ASIC has been run by a procession of former lawyers and bankers who have personal relationships within the industry.

Current chairman James Shipton worked for nearly 10 years in the securities division at Goldman Sachs in Asia and then moved to the Hong Kong Securities and Futures Commission as an executive director.

His predecessor Greg Medcraft started as an accountant at KPMG and then moved into banking, eventually becoming global head of securitisation at Société Générale. (In 2012, Medcraft famously described Australia as a “paradise” for white-collar criminals because of soft punishment.)

And before him was Tony D’Aloisio, the former head of the Australian Securities Exchange (ASX) who spent nearly 30 years at Mallesons as an international trade and mergers and acquisitions lawyer.

Australia’s corporate executives are a tight-knit bunch. Most of them will have attended one of a handful of private schools and A-league universities before going to work at a firm in one of two main capital cities – Sydney or Melbourne. In such a small petri dish it is easy for hubris to breed.

A level of arrogance extends to the macroeconomic environment with the country enjoying 27 years of consecutive growth, meaning it hasn’t experienced a recession since 1992. ASX-listed companies attract strong support from a compulsory national retirement scheme that requires workers to set aside 9.5% of their salaries in pension funds. Meanwhile, executive salaries are touching all-time highs having risen to near pre-global financial crisis levels this year, according to policy think tank the Australia Institute.


The record number of class action lawsuits against AMP shows investors are tired of watching the value of their shares plummet when executives behave badly. It also shows how desperate they have become, as the enormous legal costs will only eat into the pool of funds they hope to recover.

Fox at ASA said it is time for Australian companies to refocus on honesty and integrity and to take their compliance obligations seriously. “We believe companies should have a social licence to operate, meaning board directors will be required to switch focus from staying within the law to doing what is best for the long-term benefit of stakeholders,” Fox said. “Instead of asking ‘can we do it?’ we want them to ask ‘should we do it?’.”

Fox is urging the ASX to include the concept of social licence in a new set of corporate governance principles now being drafted, while Davidson at ACSI wants shareholders to be able to hold companies to account on environmental, social, and governance (ESG) issues via non-binding shareholder resolutions. “The current framework for shareholder resolutions is flawed and needs to be reformed to give shareholders a greater voice on ESG,” she said.

Fox and Davidson say companies that show a lack of urgency in adapting to changing community expectations will be singled out for activist scrutiny. “We are quite happy to vote against directors at elections,” Fox said.


The prospect of more board directors being sacked for sloppy oversight has not gone unnoticed by Angus Armour, CEO at the Australian Institute of Company Directors. Armour said boards need to work more quickly to respond to news about bad behaviour.

“Mistakes will happen but the community will be far more sympathetic if directors are quick to follow up on complaints and breaches of the law.” Armour said the complexity of financial institutions – with their many lines of business and complicated products – can make it difficult for board directors to get a clear picture of what is going on, but “there is no excuse for complacency”.

With regulatory scrutiny on the rise, the institute’s members are becoming more cautious about taking on directorships. Said Armour: “There are higher insurance costs and personal risks.”


There are already signs that ASIC may be getting tougher on enforcement in response to the royal commission. According to The Australian newspaper, ASIC is preparing a lawsuit against banks caught in the fee-for-no-service scandals that could cost the sector up to A$1 billion in fines and compensation. And, on September 5, ASIC was successful in reaching an out-of-court settlement with Westpac after the bank breached consumer protection laws by failing to properly assess 10,500 home loans. Westpac was fined A$35 million.

The government has set aside A$70.1 million in additional funding to help the regulator sharpen its game, including A$26 million for litigation. Some of the money will be used to hire new ASIC staff, who will be embedded inside the major banks and AMP to act as principal integrity officers and to report misconduct.

Chairman James Shipton has told media outlets he is working on a new strategic plan for the end of the year. The plan is likely to include increased fines and penalties recommended by a government taskforce which conducted a review into ASIC’s enforcement powers at the end of last year.

The taskforce has suggested upping the maximum prison time for the most serious financial crimes to 10 years for individuals and increasing the maximum fine for companies to A$210 million. It has recommended disgorgement penalties to ensure companies cannot financially benefit from misconduct and an increase in ASIC’s search capabilities, such as the power to intercept telephone calls. Time limits for reporting breaches may also be extended from 10 days to 30 days, provided the clock starts as soon as the breach is recognised.

What ASIC really needs is a stronger dose of scepticism, said Gerard Brody, CEO of the Consumer Action Law Centre, who sat on the enforcement taskforce. “Historically there has been a tendency for ASIC to trust the people they are regulating when what is needed is [a] willingness to follow through with actions,” Brody said, adding that he would like courts to be more efficient at resolving cases quickly. 

The law centre is calling for a similar level of vigour from company directors who should have the guts to stand outside the petri dish and call out wilful behaviour among executives when they see it. “This isn’t a cushy job to do in your twilight years,” Brody said. “Directors need the skill and candour to provide clear oversight on the risks faced by companies, particularly the risks to customers.”

Whatever Shipton announces in his strategic plan, it must include a renewed commitment to accountability and transparency. FinanceAsia made several requests to ASIC for an interview and sent Shipton a detailed list of questions asking him to explain how he plans to protect shareholder value. ASIC declined to answer the questions.

Schmulow isn’t hopeful that increased powers will have the desired effect of making the regulator more confrontational. “There is no point in burnishing your arsenal if you are too afraid to step onto the battlefield,” he said. “ASIC already has the power to vary and suspend licences, and to send people to jail. Corporate Australia isn’t going to take notice until it starts to do these things.”

The royal commission is scheduled to wrap up its proceedings in December before issuing a final report on 1 February next year. It would be a crying shame if those executives who are found to have lied to the regulator are let off the hook.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media