“What’s this about a royal commission or there’s a huge problem in banks? There’s no culture problem in banks”
– Lindsay Maxsted, Westpac Chairman, Boss Magazine May 2016
I hate to tell you this Lindsay but there is. It’s deep, it’s pervasive and if you don’t do something about it, the government should.
Last week’s Boss Magazine, a monthly liftout from the AFR, made for depressing reading. The Chairmen of all four big banks were interviewed about their organisations and their efforts to manage conflicts of interest. Some of the comments are extraordinary.
Maxsted is quoted saying: “We are all disappointed that people look at the sector the way they do”. He doesn’t seem the slightest bit disappointed about the way the sector has behaved, only the way it is perceived.
The sector’s response to the Labor Party’s call for a royal commission is to get their own association, the Australian Bankers’ Association (ABA) to do its own review. The purpose will be to find out whether “commissions and incentives paid to brokers and others are in the best interests of customers”. Really? Is that the starting point? I thought that question had been answered when Fred Schwed wrote Where are the Customers’ Yachts in 1940.
These people are either wilfully ignorant or genuinely don’t know how much animosity exists towards their organisations. And it’s not just from the general public. It is from their own staff more than anyone.
How do you think it feels to be an employee at Westpac reading that your chairman says all staff should be putting the client first, when your whole remuneration set-up is completely at odds with this objective? Telling someone that they need to put the client first, but that they won’t be getting a bonus when they do so, is placing them in an impossibly conflicted situation. Imagine being a Commonwealth Bank employee and reading that the company is going to put 40,000 staff though “ethics training”? Thank you, CBA, but it’s not me who needs to learn what ethics are.
The problem is not a few rotten apples, but a lot of good apples trying to survive in a rotten barrel.
I’m not one for government intervention but, judging by this interview, it is nigh on impossible to see the banks fixing the conflicts themselves. Defending Westpac’s vertically integrated model, Maxsted laughably says customers “get far better outcomes” from Westpac’s own products that those sold “off the shelf elsewhere”.
If that is really his genuine view of the world, his board will only have themselves to blame when a government forces change upon them. Surely that is only a few more crises away.
22 thoughts on “Do the Banks Need to be Broken up?”
I wholeheartedly agree that the government needs to do something, but personally, I feel as though it’s ASIC’s job. Rather than spending tens of millions of dollars on a Royal Commission, I’d prefer the funds be directed towards ASIC for better enforcement.
ASIC! You have to be kidding. It’s not lack of funding at ASIC, their whole organisation needs a culture change.
The really big opportunity for the current government to act on ASIC was the recent review done, and what was their response. Leave the same board structure in place (one of the key recommendations for change) and reappoint the incumbent Greg Medcraft for a further 18 months. That was the biggest joke. Two months ago was the time to really get stuck into these corporate shenanigans but it seems just more of the same.
The only way ASIC acts is when the bleedingly obvious is exposed on TV by others (think Four Corners with CBA, and 7-Eleven). I think their bureacratic structure needs a good swift kick with a whole new approach to corporate regulatory enforcement.
You know the first response of ASIC to anyone reporting a possible corporate misbehaviour is to send out a flier saying firstly anonymous exposures are not permitted, and secondly if you can pursue it yourself (especially through the courts) then do so. Their response is always a standard letter and if you provide detailed information then you just wait and wait and wait for them to respond with no idea of what they are doing.
Have you heard a word from ASIC after the Dick Smith Heist? Not a word. That says it all in my mind – whether it was legal or not it was a disgrace and they should at least be calling for some action to prevent it occurring again.
Lindsay Maxsted seems to be ‘off with the fairies’ with his comments.
It always amazes me that the Chairman of the Board (along with the Board) are only too keen to defend the management yet their primary role is to look after the organisation itself on behalf of the shareholders. It has become such an accepted form of corporate response (go to any AGM and you will see it right before your eyes) that one wonders whether they have looked at what the Corporations Act says in terms of who they are primarily responsible to.
To have the ABA do a review of the banks is a wee bit akin to having the fox do a security review of the henhouse.
Your comments on ASIC are spot on. Just ask the collection of shareholders in Lemarne who deluged ASIC with complaints about what was going on. Take action through the courts, taxpayers, they said. They are incompetent clowns.
I didn’t realise that ASIC actually enforced anything. Unless you count finger-wagging and wrist-slapping as enforcement.
CBA can send the whole country on an ethics course if it wants. But if the company’s response is to fire staff that bravely step forward to point out instances where customer well-being is at odds with profit – see former Comminsure chief medical officer Dr Koh for just one example – then nobody will be fooled by the charade.
Reminds me of that time I left a comment on an internal bank message board. I thought it was BS that we spent time going through the questions in an internal employee engagement survey as a group (ahead of doing the survey). The employment engagement survey was linked to bonuses. I received a talking to that day and was asked to “clarify” comments on the message board.
Why is it a surprise that when you go to a business they sell you their products ?
Best interests? How can you apply this with any measure. When you go to a ford car dealer, do you expect to be told , “we spent millions building this business so we can tell you its in your best interests to buy a Toyota!” It’s laughable. You go to Westpac expecting that if you are referred to other parts of the business you will be sold westpac products. It is up to you as customer to decide, the same as a Ford v Toyota decision , whether the Westpac product suits your needs.
The difference is that I go in to a car dealership expecting to buy a car. I walked into ANZ three years ago to open a deposit account and they spent the next two years calling me trying to sell me life insurance and financial planning (I eventually had to file a formal complaint to get them to stop). I can’t say I have had that experience with a car dealership. And, as providers of what is today an essential service, the banks have a much higher bar to jump over.
Do you not know how to hang up a phone Steve?
A bit over a year ago, I was shopping for term-deposit rates at the various banks. I couldn’t remember whether the RBA guarantee was for $200k or for $250k (it’s $250k per depositor per ADI), so I asked the branch manager at the Westpac, and he actually became a little indignant that I could think that Westpac might fail. He then very patronisingly told me that it is “completely impossible” for Westpac to fail, as though I was a very young child who was ignorant of what ought to be a self-evident fact.
It would seem that a culture of hubris has permeated Westpac from top to middle-bottom. And as the biblical saying goes: “Pride goeth…before a fall”. It’s ironic that this is the very same bank that had a near-death experience in the early 90s.
PS. I avoided the pesky phone calls by “accidentally” mixing up two digits in the phone number I left them – consistent for someone silly enough to believe that banks can fail.
Just step back for a minute. What business is not riddled with conflicts of interest as you have described? Everyone involved in sales of any kind is similarly conflicted – including the business development/sales part of your business.
You might be right, but they don’t try so hard to pretend otherwise.
Also, my experience is they straight up lie. I had an ANZ employee tell me their total super fees (in NZ – I’m a New Zealander) were $2 a month. She was insistent. I told her she was definitely wrong.
I later figured out she was only representing the fee to have my super balance show up on internet banking. That costs $2 a month. You pay the ~1% p.a for passive exposure on top of that….
I’ve been a CBA customer for decades now and have never encountered any problems
whatsoever. been very happy at all times with services provided, mortgages, insurance,
bank accounts, share trading account, managed funds etc.
sorry to hear that some people have had bad experiences, but to suggest the banks need
to be broken up is way over the top.
Ever heard of the Global Financial Crisis Carlos?
Did you watch the exposure of the CBA over their life insurance on Four Corners recently? Ever wonder if the life insurance policy you had wasn’t going to be paid to your family when you died?
Ever thought about the people who went to the CBA and Macquarie Bank for some financial planning advice with their life savings, and lost most of it through conflicted advice (google up Jeff Morris and you’ll get the picture)?
Did you follow the recent Senate inquiry into the banks and their ‘high-level’ cover-up on financial planning, with your bank (CBA) being especially prominent?
Have you read in the papers of the investigation into the CBA (your bank), Westpac (Lindsay Maxsted’s bank) and the NAB over rigging the bank bill swap rates for their own benefit. Try this little quote to get an idea of what one of the Westpac traders thought was good banking practise
“Today I got one month from everyone because I pushed the one month down, right, it was going to set at 20 right, then I got it down to 23.
“I know it’s completely wrong but, I knew it was completely wrong but f..k it, I might as well, I thought f..k it. We’ve got so much money on it, we just had to do it right.”
You can read more on this in The Australian April 6, 2016 in article by Leo Shanahan.
Yes, the banks are such good corporate citizens Carlos. Beyond reproach.
I lived through the GFC just fine thank you and so did my investments.
I don’t have LIFE insurance with the CBA or any bank.
I don’t use financial planners and never will.
By all means punish the wrong doers to the fullest extent of the law, but to
suggest that “the banks need to be broken up” is over the top, and
to do so would produce financial markets Armaggedon in this country
to nobody’s benefit except the shorters.
do you really think the broken down organisations
resulting from breaking up the banks would never again have people who do the wrong thing ?
Mmmm. A sort of selective hearing and doing. Oh well who cares about my neighbour so long as doesn’t impact me? A sort of ‘banks are too big to break up’ approach. Too big to fail and too big to break up so let’s just let leave them be eh.
and the GFC was not in any way shape or form the fault of the Aussie banks
blame the Americans with their subprime mortgage lunacy.
If you want to know what really bad banks look like, read “Shredded” – a 500 page (+ index) takedown of Royal Bank of Scotland under Fred Goodwin (had his knighthood stripped) written in 2014 & updated last year. The author is Ian Fraser. This bank grew to have assets of 1.9TRILLION pounds at its worst along with hubris, egregious Directors, fraud, lawbreaking, dodgy prospectuses. It’s got everything! Contained therein is the delay & obfuscate template for CBA behaviour (and the current RBS CEO came from CBA….) along with the old boy network of regulators. RBS shares are still less than half what the UK Govt paid in 2008 as part of the bailout..(don’t forget the 10-1 consolidation).
Thanks Andrew. Downloaded and started reading last night. Here’s a quote from the Preface which is pertinent to Steve’s suggestion
“If there’s one lesson to be learned from the financial crisis, it is that gigantic, world-straddling, ‘universal’ banks like the one RBS became under Fred Goodwin make little or no economic sense. Rather than helping the broader economy, they tend to exploit implicit government subsidies in order to ‘rent seek’, with their main raison d’être being to enrich their own management.
Not only are they too big to fail, they are also too big to manage, too big to regulate and too big to prosecute. The only viable long-term solution for such financial behemoths is to break them up into more manageable chunks. That way, they are more likely to focus on serving the needs of the real economy in the geographies on which they focus and less likely to prioritise negative behaviour like rent seeking and empire building. (Rent seeking is what happens when a company uses its resources to obtain an economic gain or ‘rent’ from others but fails to give any reciprocal benefits back to society through wealth creation.) Smaller banks find it difficult to hold a gun to the government’s head over the re-regulation of the banking sector or to hold the government to ransom should they get into difficulties.”
Before the Banks, before everything, the “Government ” ( Federal and States and Local Councils ) need to be broken up, restructured, downsized and filled with people who have proven themselves in business. They continue to misdirect the real problem onto everything and one but themselves…….. Rotten ‘t core.
People have noted problems with the banks and that is accepted by all. No one has managed to show that breaking up the banks would help or describe exactly what breaking them up means. It seems to me to be overkill when the problems could be addressed.
1. Eliminate commissions in selling financial products.
2. Set Bank Bill rates based on the majority of trades rather than a narrow window in time which encourages gaming the system.
3. Give ASIC more powers as regards lending standards. They have pushed the banks back on investor loans and that’s been positive. How are we going with the apartment market ? Is that becoming a risk ? If it is then ASIC needs to address this.
4. This is more for the ACCC and perhaps greater powers but ensure banks cannot gain monopolies on areas like payment networks etc
These are massive institutions and should be heavily regulated (not the best places to show off the benefits on Laissiez Faire free market economics). However when I look around the world especially in the aftermath of the GFC we seem to have managed better than many other countries. On that basis keep managing when the problems arise would seem far less risky than a complete break up and who knows where that might end.
S.J- might be better analysis to focus on what you do best.Not a lot of investor value in your comments and regardless of the action taken..What do you do with a Bank that ha 80,000 customers,has never achieved what it is intended for (to breakup the 4 pillars)and ties up a huge amount of capital to operate in a Company that has shown no shareholder capital value for ten years.
More relevant as possible long term investment than big four.