Banks chastened by Senate, but UK experience serves real lesson

The Commonwealth Bank’s chief executive Ian Narev apologised to clients given poor financial planning advice. AAP/Stefan Postles

The full extent of the arrogance of the Four (and a half) Pillars was on full display at the Senate Hearing into the financial product misselling scandal this week in Canberra.

The only long-standing CEO who was in the position at the time of these scandals was Macquarie Bank’s Nicholas Moore (ANZ did send the deputy CEO Graeme Hodges, Westpac had better things to do). Moore admitted that, after being belatedly prompted by the Securities and Investment Commission (ASIC), 195 cases of possible misselling had been reviewed, of which 108 had been found eligible for compensation totalling A$9.5 million. Moore noted that some 189,000 letters had been sent out but give no idea of how many cases remain to be reviewed.

Relative newcomers, the National Australia Bank’s Andrew Thorburn and the Commonwealth Bank of Australia’s Ian Narev were thrown into the fray, fresh-faced and suitably contrite. “At the outset, I apologise once again unreservedly to the customers who received poor advice from us,” Narev told senators. But Narev has only been CEO for three years; where were the directors who were at CBA throughout the scandal?

Thorburn, (appointed as CEO in August 2014) admitted that NAB had also “let some clients down” but promised that “trust and transparency” would be the watchword for its customers over the next decade.

But a look at how such scandals are handled overseas might give a different perspective. Each quarter, the Financial Conduct Authority (the UK equivalent of ASIC) publishes a report on how customers are being compensated for Payment Protection Insurance (PPI) products that were mis-sold to them.

In January 2015, a total of £424.5 million was paid out to customers whose complaints were upheld by the UK’s major banks, bringing the total paid out on the PPI redress scheme since January 2011 to £18.5 billion (around A$35 billion).

And in another scandal involving the misselling of complex Interest Rate Hedging Products (IRHP) to small businesses, current compensation paid by the major banks is running at some £1.8 billion but could grow much bigger soon.

A reading of the PPI scandal might cause the boards of Australian banks to have a rethink as they chat convivially after their next board meeting. The PPI scandal emerged over a decade with customers’ complaints being arrogantly ignored by banks, until competition inquiries pointed out case after case of mis-sold PPI products. At this point it should be noted that the PPI cases involved quite small sums of money, often less than £100, not the hundreds of thousands of dollars lost by customers in the Opes Prime or Storm Financial scandals.

The UK banks stonewalled until a court case was decided against them and they were forced by the regulator to set up a comprehensive redress and compensation program. Note Andrew Thorburn of NAB is already well aware of the angst of PPI as the FCA recently fined the troubled Clydesdale Bank (which NAB has owned since 1987) more than $40 million for continuing “serious failings” in handling customers’ complaints.

Now one could argue that UK banks are bad and that Australian banks are boy scouts. But is the alternative perspective that UK regulators are better than Australian ones?

As information trickles out about back-door payments and strong arm gagging of customers, the probability of the latter being accurate increases.

It is little wonder that the major banks back an industry compensation scheme for cases of misselling, not least because it will be the customer who ultimately pays for it. After all, an industry scheme was sort of endorsed by the Murray Financial System Inquiry. But David Murray (CBA chief executive from 1992 to 2005) also pointed out that “government provision can avoid conflicted incentives, but it can come at a cost to taxpayers and involve moral hazard”. In the end, the taxpayer rather than the banks’ shareholders will pay up under such a scheme.

As the Australian financial products scandal drags on over years, the call for a Royal Commission will grow; after all the government has set up a Royal Commission to address issues raised by the big end of town into trade unions. If such a Commission is forced on this government - or the next - the banks will only have themselves to blame. They should get on the front foot now.