You couldn’t make it up. It’s the Royal Commission follies. And this is just early days. Evan Jones
(note: this article is 11,000 words long)
Not a good start
Those fronting for the banks, the Liberal Party front bench to the fore, have been denying the necessity for a banking Royal Commission for yonks. Overnight, the Big Four decide to OK a Royal Commission, so we are going to have a Royal Commission. On the banks’ terms. Brilliant!
The much desired Royal Commission is decapitated from the start. Check out Turnbull’s draft Terms of Reference.
The first paragraph is a giveaway:
'Australian has one of the strongest and most stable banking, superannuation and financial services industries in the world, performing a critical role in underpinning the Australian economy. Our banking system is systematically strong with internationally recognised, world’s best prudential regulation and oversight.'
What a gigantic fib, or set of fibs. This opener sets the scene for a short inquiry, because there’s implied to be nothing much to see under the covers.
Sections 4 & 5 of the draft Terms are the main worry, with respect to discretionary exclusions. Moreover, a key issue remains unanswered: will victims gain direct access to the Commission’s hearings and investigations?
Section 1(c) looks like a backdoor attempt at yet another union bashing inquiry with a potential attack on industry super funds. Numerous commenters have made the same point, including former NSW Liberal Party leader Peter Collins.
One has to hope that appointed ex-High Court judge Kenneth Hayne has no way of keeping the lid on the foul smell once the lid has been lifted.
Several dimensions demand close attention.
The naysayers and their calculated ignorance
Here’s one self-proclaimed expert, John Landels in the one 29 November:
'Yes, there have been misdemeanours, but they are being dealt with by current regulation and bank management. We are fortunate to have a sound, competitive and well-regulated banking system which survived the financial crisis. Let us not ruin it.'
Then there’s the well-credentialled financial journalists.
'Multiple inquiries, both public and private, over the past 10 years have failed to uncover systemic culture problems across the financial services sector. There have been egregious cases of misconduct and unethical behaviour but these have occurred at different times in different institutions and were found to be isolated cases.'
This from John Durie, The Australian (subscriber only):
'As the banking sector appears headed towards a seemingly inevitable yet totally unnecessary royal commission…' (22 November)
'[Mathias] Cormann told the The Australian and BHP’s Competitive Advantage Forum a new inquiry ‘wouldn’t actually lead to any public interest benefit at all’. He was 100 per cent correct, the bank leaders unsurprisingly said.' (24 November)
'If [a Royal Commission] happens then we know it will be the result of politics over reason and yet more evidence of the dysfunctional state of the government. … [There is a Productivity Commission inquiry into banking competition and an APRA inquiry into CBA culture.] What is the point then in spending another couple of hundred million dollars on a bank-bashing venture with no public benefit.' (28 November)
From Terry McCrann, The Australian (subscriber only), 2 December:
It’s not quite a royal commission about nothing; just a royal commission about nothing that we don’t already know.…
Yes, there have been cases of the banks acting unfairly and even illegally. But do we need a RC to uncover and rectify those cases? The simple fact that we ‘know about them’ is because they have been projected in various other forums, including dozens of other inquiries.
Is anyone going to seriously suggest that in 2017 legitimate victims are powerless? Either to get their ‘victimhood’ into the public arena or, more importantly and consequently, to get appropriate redress?
We have superior solutions to the marginal problems and they’re already in place or on the way. But that’s why we don’t need a Royal Commission, so this Clayton’s version is a show to shut all the whingers up. And it’s a huge waste of time and taxpayers’ money.
Boyd, Durie and McCrann have been on the job for decades. McCrann has always been a Murdoch hack, hectoring the hapless readers of the tabloid Herald-Sun. Boyd and Durie (also previously at the AFR) have quality journalism under their belts. What’s going on? Their status carries with it significant reportorial responsibilities.
More from McCrann:
'That somehow all this has continued to fester unseen, unlitigated and unremedied? That somehow they’ve all fallen between the cracks of the various 50-plus inquiries into the banks and associated services that have taken place just in the last 10 years since the global financial crisis? To say nothing of the multitude of forums from media, to parliaments, to a cricket team of regulators and ombudsmen, which are available and have dealt with them; along with the various exercises of remediation from the individual banks themselves.'
'That somehow all this has continued to fester unseen, unlitigated and unremedied'?
There’s the rub. Where to start?
McCrann possibly can’t bring himself to read Fairfax, where a series of CBA crimes have been extensively reported – Storm Financial, the swathe of Bankwest customer foreclosures following the CBA takeover, Commonwealth Financial Planning, Comminsure and its ATMs as ready money laundering vehicles. These affairs were hardly festering unseen, and none of them appropriately remedied.
As for the significant small business and family farmer area, naysayers have more (superficial) cause. No media deigns to go there.
There is the occasional exposure in this domain, such as the 60 Minutes program in April 2015, centred on then WA wheat farmer Rod Culleton, and the Fairfax Good Weekend farmer story by freelance journalist Susan Chenery, 9 May 2015. Nothing came from these stories. Culleton was, of course, briefly a One Nation Senator, deposed for his having fallen foul of the law (much publicity), but his claims regarding the ANZ’s alleged unconscionable treatment of former Landmark farming customers were never pursued by the media or the regulators.
There was also rare media exposure of two small business cases, both NAB: Kay/Canli/Inak (2010), the rare pro-victim court judgment here) and Leith Williamson (2016). These victims had favourable settlements, not least because the NAB’s action in both cases was transparently unconscionable (arguably fraudulent) but because publicity exposed the NAB to shame. Media exposure or not is thus an important part of redressing the power imbalance.
However, in general, the extent of the ravages suffered by small business and family farmers from bank lender predation remains invisible. Although Boyd, Durie and McCrann could readily educate themselves, should they have considered it necessary to fulfil their mandate.
Countless submissions by bank victims are available at the sites of relevant Parliamentary inquiries over the past decade. For example, the 2012 Post-GFC Banking Sector Inquiry, the 2013 Performance of ASIC Inquiry, the 2015-16 Impairment of Customer Loans Inquiry, the 2017 Consumer Protection Inquiry and the Lending to Primary Production Customers Inquiry.
Admittedly, even getting through a handful is a hard slog, but the evidence is there. And they are painful to read.
The last word goes to Harold Mitchell, SMH, 8 December, who thinks that this Royal Commission is a waste of time. Mitchell is an air-head master of superficiality, and a waste of time and space. His elevation to regular columnist, following the retrenchment of myriad serious journalists, epitomises Fairfax’s ,10901 attraction to trivia and establishment verities over substance.
Who is implicated in the grand scam?
On 30 November the eight chairs and CEOs sent Treasurer Scott Morrison a letter signaling their readiness to accommodate a Royal Commission. The heat had become intolerable. Clearly, they wanted a process that they could exert the greatest influence over, with the Liberal National Coalition in power federally and a favourable terms of reference.
Nobody has pointed out the obvious. The boards of the Big Four are implicated in the ongoing scams, and the dysfunctional structures and cultures that generate them. So what are the boards for?
When the NAB’s trading desk was exposed in 2003-04 as manipulating trades and trading figures, board chairman Charles Allen sacked CEO Frank Cicutto and he himself fell on his sword soon after. Nothing of that nature is happening here. CBA CEO Ian Narev has been allowed to retire gracefully, meanwhile still delivering crackpot utterances as if he carried authority.
Where are the non-executive directors of the Big Four? Drawing their pay for remaining silent.
Two people in particular are exposed as shameable: David Gonski and Ken Henry. Gonski, he of the egalitarian school financing reforms, long-time chancellor of UNSW, non-executive chair of the federal Future Fund and so on, should be a public figure beyond repute. Yet he besmirches his reputation and his role in public bodies by continuing in a senior role in an industry mired in corruption. He should quit his ANZ chairmanship post-haste.
Ken Henry’s Wikipedia (public_servant) entry bizarrely still has him as a public servant. In March 2014, I sent Henry a letter, which was returned unopened. The letter, highlighting that his move was not in the public interest, is published HERE.
The Andrew Thorburn and Ken Henry team runs a better ship than previous CEO Cameron Clyne (a figure head?) and board chairman Michael Chaney, who could hardly be effective while residing in Western Australia. But the new team hasn’t changed the errant or corrupt pockets of culture at the NAB. From my knowledge of the recent experience of several NAB victims, nothing has changed under the bonnet.
The Thorburn/Henry team divested the running sore that was the British Clydesdale Bank and its Yorkshire subsidiary — a smart move in itself, yet while leaving the victims of that appallingly run bank to hang out to dry,
Equally bizarrely, in August 2017, Henry attempted to divert the distrust of the financial sector by claiming that most, if not all, large institutions are distrusted by the public. If he’s talking about the age of monopoly capital, he’s onto something. But first, physician heal thyself.
In mid-November, NAB sacked a score of lending officers for manipulating loan documentation. Well and good, but purely token. NAB, as with the other banks, is under pressure, and is throwing some staff overboard to keep the investigators from the door. If would be delightful if any of those sacked became whistleblowers regarding NAB’s cultural proclivities.
A key indicator to lead one to question whether anything has changed at the NAB is the fact that the NAB under Thorburn (and later Henry) chose to take a guarantor to court. In a landmark decision in NAB v Rice, Elliott J decided for the guarantor, because the guarantee had been wrongfully obtained. Thorburn/Henry’s NAB appealed, claiming that the Code of Banking Practice was merely an optional extra. The NAB lost on appeal, but it appears to be business as usual at the NAB regarding the Code.
The NAB has an attraction to public personnel. The bank (under CEO Don Argus) got the Liberal Party out of a financial hole in the early 1990s and was a major financier of John Howard’s victory in 1996 (Argus wanted the Four Pillars policy scuttled).
The NAB sponsored the 2006 Melbourne Commonwealth Games to keep Premier Steve Bracks on board. The bank subsequently employed Bracks and moral campaigner Tim Costello on an ethics committee (joke) for some time. It facilitated a smooth revolving door for Arthur Sinodinos between playing ministerial adviser and selection for the Senate. Ditto for Kelly O’Dwyer, between playing ministerial adviser and election in a safe Liberal seat.
The bank had a friend in the judiciary, Queensland’s Paul de Jersey, with a string of court directions and judgments favouring the NAB. A sometime NAB staffer told me that the NAB even hires ex-policemen (this claim hasn’t been substantiated), meaning that the prospect of a bank retirement package might colour their policing work in that domain. The bank has recently hired ex-NSW Premier Mike Baird, on a fabulous salary, to continue the same rotten business that Baird pursued as Premier. In short, the NAB buys influence.
The hiring of Henry is of this genre. Like Gonski, Henry continues to be involved with a number of public bodies. One can’t be a key player in a totally compromised private banking sector at the same time. Henry should be forced to choose one or the other.
Then there’s David Murray. Murray (with then General Counsel Les Taylor) was a key figure in eradicating the public purpose from the CBA (see my ‘The Dark Side of the CBA’, Part 1), yet he retains an elevated status as an authority on the financial sector. He was chosen by Prime Minister Tony Abbott and "lifter and leaner" Treasurer Joe Hockey to perform a Clayton’s investigation of the finance sector and head off fundamental critique at the pass.
With his November 2014 Financial System Inquiry report, Murray skirted all the issues that have led to persistent calls for a Royal Commission. The Murray Committee and Advisory Panel comprised only bankers or business people. The treatment of "consumer protection" is risible (Ch.4). The Report opines that alternative dispute resolution schemes are working well (on the contrary), that self-regulation is often superior to government regulation (it isn’t) and that product providers need to lift their game in terms of accountability (they won’t of their own accord). The small business and farmer borrower segments were, as usual, ignored. In short, a whitewash, just like Treasurer Keating’s 1991 Martin Report.
Murray has been singularly aggressive, outspoken, in criticising any attempt (for example, the SMH, 28 November) to hold the banks to account. Yet he continues to be quoted as an authority.
This is the point here. Amongst those with significant roles in perpetuating finance sector crimes and public figures in pubic roles commanding respectability and authority are some of the same people. This is an intolerable overlap. It is a contributory factor for why the finance sector has remained immune for its unconscionable and fraudulent practices to date.
* * *
The ongoing dialectic: dissent regarding banks, and neutering and silencing of such dissent
Over the last 30 years (since comprehensive financial deregulation), the scale of public exchange regarding complaints about banks, bank opposition to reform, and the combination of official formal concern with substantive inaction has been massive.
Selective memory filters the past so that our brains don’t explode and we can function in the present. But this filter has worked to the advantage of the banking sector and its collaborators (including in the regulatory agencies and in politics). The banks lobby and stonewall, wear everybody out, the media complicit, things quieten down for a while. Bank malpractice continues, perhaps takes new forms, the fight flares up again, and the banks and their collaborators resort to time-worn strategies of lobbying and stonewalling. The pollies promise reforms that turn out to be hollow. The regulators draw their salaries and mouth platitudes at bizoid conferences. Variations on a theme.
Being long addicted to cutting articles out of newspapers (before the digital revolution) I have a better idea than most of the scale of the exchange, the passage of time and the nature of the impasse.
Do not imagine that we are now experiencing an unprecedented height of dissent with inevitable prospects of unprecedented progress against bank bastardry. We’ve been there before in the late 1980s and early 1990s. The Foreign Currency Loan Scandal (FCL) alone kept banks’ foul play constantly in the media. I have a fat folder of FCL cuttings spanning 15 years, from 1986 to 2001.
The coverage reached a peak of frenzy during 1991, with the exposure of the so-called Westpac Letters (for which, scandalously, the odd account previously on the web has disappeared). The one weakness then compared to now was that there was only one Parliamentarian on board – Democrat Senator Paul McLean – and he was driven out for his impertinence.
So what happened to the dissent? Treasurer Keating gave us the 1991 Martin Inquiry and Report and a follow-up mickey mouse Elliott Committee, that was supposed to monitor post-Martin reforms. The dissent was siphoned off, worn down.
The Westpac Letters story and the corrupt Martin Inquiry process are outlined in the book authored by McLean and his legal adviser James Renton, Bankers and Bastards, 1992.
All we got following the Martin inquiry was self-regulation via the Banking Ombudsman and the Code of Banking Practice, both quickly neutered. Westpac was broke. The CBA, in the process of privatisation, had to be tarted up. The banks had to be saved from themselves and the victims be damned — a now recurring pattern with financial crises.
Thus premature optimism regarding the current scenario should be kept in check.
A quick run through the state of play
In August 2015, I wrote a three-part article on Independent Australia on recent scenes in this 30-year continuous drama:
• On 12 August I recounted the great burst of the regulator’s discovery of and "amazement" at a dysfunctional culture within the banking system. As I noted, all talk and no action.
• On 17 August, I listed a number of bank victims over the years, some for whom the foreclosure process highlighted criminality to a high degree. No bank is without guilt, including the pathetic second tier bunch. I also noted the chief personnel (notably, CEOs and law firms) responsible for each takedown.
• On 20 August, I emphasised the need to prosecute personally individuals within the banks, whether errant lending officers or senior managers. I highlighted the legal difficulties of pursuing individuals within a "guilty" corporate entity, but emphasised the high priority of resolving these difficulties within the Commonwealth Criminal Code and the Corporations Act.
Desirably, a Senate inquiry into the penalties for white collar crime was established and delivered its report in March 2017. A single article covered the issuing of the report — Adele Ferguson in the Australian Financial Review, 27 March. Ferguson highlights the report’s recommendations for higher penalties for both civil and criminal offenses, including gaol terms.
A Treasury-resourced ASIC Enforcement Review Taskforce was earlier established in October 2016. In October 2017, the Taskforce issued Position Paper #7, whose recommendations for enhancing penalties are neatly summarised by Minter Ellison.
All this looks impressive on paper, for once. But what does it mean in practice?
First, there is no mention of ASIC’s willingness to act in said enforcement. There is no mention of the 2014 Senate report into ASIC’s failings.
Ferguson highlighted the lacuna:
'But more powers and resources can only go so far. ASIC has to have the backbone to use them. The 2014 Senate inquiry into ASIC found it was a "timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution".'
Instead, the line, mutually pushed by ASIC itself (naturally) and the authorities, is that ASIC’s failures are merely a matter of inadequate enforcement powers and resources. That mentality was prominent at the 26 April 2017 hearings,10375 of the Senate Consumer Protection Inquiry at which ASIC representatives appeared.
Second, to what crimes in particular and what roles are these penalties addressed? Language remains in the abstract. There is a disconnect here. Are the authorities thinking about insider trading, or rogue financial advisers, or staff embezzlers of company funds? In all probability they are, but these arenas are already covered or could be readily fixed up. Are the authorities thinking about bank CEOs and chief general counsels? Almost certainly not. Indeed, it is not unlikely that the authorities have yet to conceive that these elevated personages could actually conceive or engage in white collar crime.
Until the authorities get around to the latter categories, then all this self-congratulation regarding heightened penalties is so much grand-standing.
The litmus test is the CBA foreclosure of close to 1,000 former Bankwest customers when the CBA acquired Bankwest in December 2008. This affair was transparently a crime — a crime of large scale, a crime conceived and perpetrated strategically, and a crime that could only have been directed at the most senior levels of CBA management. ASIC looked the other way. The two parliamentary inquiries established to examine this affair – the 2012 Post-GFC Banking Inquiry and the 2015-16 Impairment of Customer Loans Inquiry – merely went through the motions. The senior executives of CBA and Bankwest, who should be up for investigation, lied to both Committees during the hearings.
Integral to the second point is the problem of attribution of corporate crime to specific individuals. The Penalties for White Collar Crime report and the Taskforce don’t touch it. As I mentioned in my 20 August 2015 article, the massive Corporations Act doesn’t seem to acknowledge bank (or other "financial service providers") crimes against customers. The Commonwealth Criminal Code Act and its possibilities has been ignored. If the authorities are serious, they should be employing the finest legal minds (in conjunction with related experts overseas) in tackling the attribution problem.
At present, the likelihood is that, at best, a regime of enhanced penalties will capture the odd low rent rogue element, sacrificial lambs, while the serious Main Street criminals at the heart of the beast continue with business as usual. This is precisely what happened following the Senate Insolvency Practitioners Inquiry and Report in 2010 (the thoroughly corrupt industry continues unabated). Ditto with the unfolding after 2014 of the Commonwealth Financial Planning scam of its clients, when a handful of financial advisers got the chop but senior management stayed immune.
The Royal Commission
In mid-2016, I wrote another three-part article on Independent Australia.
• On 23 May, I provided a longer perspective on the banks versus the public interest, starting with the 1937 Royal Commission and elaborating on the bitter battle after the banks were let off the regulatory leash in the 1980s.
• On 24 May, I highlighted that, during two years of public pressure and from the Parliamentary Greens, the two major parties (the Nationals being invisible) showed themselves less than enthusiastic about a banking royal commission. With the exposure of the Comminsure scam in March 2016, the two Parties were left flat-footed with the escalation of public outrage. In April, Labor opted (cynically, for electoral gain?) to support a royal commission.
• On 25 May, I outlined the hysteria that followed Labor’s formal commitment. Hysteria from the banks, their collaborators and the Government. A royal commission is not needed, counter-productive and so on. That was a year-and-a-half ago. Following more bank scandals (the CBA’s money laundering affair), unprecedented Coalition backbencher pressure, the Big Four themselves decide to support a Commission, hoping to keep the whole thing under a semblance of control.
What’s at stake?
Let’s be clear about the necessary scope of the Commission’s investigations.
The banks are at the centre of it.
Yet another Parliamentary inquiry into bank lending has just concluded: a Senate Committee on Lending to Primary Production Customers. One impetus for the Inquiry’s establishment was farmer outrage at the treatment of Landmark borrowers after it was taken over by ANZ. More heart-breaking victim submissions and hearing testimony to savour. The report was handed down on 6 December 2017, with seemingly no coverage in the mainstream media at all. Par for the course.
Many of the recommendations merely request that bank lenders act legally and effect their borrower relationships with the most basic of professional ethics. That's what it's come to. The report recommends (#11) that the ANZ / Landmark takeover be subject to proper judicial scrutiny. Meanwhile, ANZ’s CEO Shayne Elliott claims that ANZ "has nothing to hide" from a royal commission.
He made no mention of the ex-Landmark borrowers. Recommendations #15 to #21 all relate to the pressing need to reform receiver practices (see below).
But the banks are just the core. Any industry on the bank teat will be part of the problem. Forgive me if I’m repeating something said before.
Add the law firms that are integral, indeed in the front line as agents, to the banks’ corrupt activities. The mix of key firms has changed over the years, but Gadens appears to be now top of the "do anything for a buck" list. Kemp Strang is up there. DibbsBarker is also high on the list, especially for the NAB in NSW. Minter Ellison is not averse to earning dirty money. HWL Ebsworth appears to be wanting to join the A-listers. There are also second tier "bottom feeders" who hang around for smaller jobs.
There’s the valuers. There is a pressure to value customer assets high as prelude to a loan and low on the way to default and foreclosure. The issue occasionally receives public attention and then disappears from view. Industry representatives appeared at hearings of the Impairment of Customer Loans Inquiry – 18 November 2015 (Australian Property Institute), 16 February 2016 (Australian Valuers Institute) – and talked rubbish, to the guffaws of victims present.
According to victims and the evidence available, the CBA takedown of Bankwest customers after 2008 involved widespread discretionary devaluation of customer assets, providing CBA with the requisite default trigger.
There’s the odd management consultant/administrator. A bank will occasionally demand that a business customer receive a consultant for investigation and report, at customer expense, whether or not a customer is then in trouble. The pretext is that the consultant will act to improve the operation of the business, but the sub-text is that the "investigation" is merely a contributory vehicle to the business’ subsequent default and foreclosure.
There’s the receivers. This is an outfit perennially devoted to plunder. The tendency to criminality is directly a product of the absolute discretion available to the receiver once placed in a foreclosed customer’s business on behalf of the bank lender.
On 27 November, the new West Australian One Nation Senator Peter Georgiou asked Senator Brandis, representing the Government, questions regarding the ongoing parlous experience of bank victims, especially farmers. Brandis, struggling to look confident before gaining his customary hubris, responded with the salvo:
"A royal commission would take forever and achieve nothing. Except for the bevy of lawyers who will be able to afford new beach houses on the strength of the fees…"
Georgiou then pressed Brandis regarding a noxious rip-off of a foreclosed farmer by the predatory receiver Korda Mentha.
Brandis responded [partial paraphrase]:
The corporate insolvency field is one where I used to practice and with which I am very well familiar. It is known that corporate insolvency practitioners sometimes charge from the estate extremely large fees. However, corporate insolvency practitioners are subject to very very rigorous regulation under the Corporations Act and also rigorous regulation and oversight by their own professional body. The arena should be kept under review and the Treasurer and Assistant Treasurer do keep it under review.
This is all 100 per cent bullshit. Brandis, as he admits, has been in the right place to know it. But Brandis is a spiv — the perfect representative of now rampant amorality amongst the political class. Why then did the Sydney Morning Herald devote its Saturday interview to this man, when there are countless selfless individuals working for worthy causes who deserve greater exposure?
A colleague, working for Deloitte in the late 1980s, claims that insolvency practice was then a specialist profession, shared amongst a handful of individuals within the big audit/accounting firms. Came the crazily-built bank-financed hot air firms, and the early 1990s recession and receivers were in high demand, and liable to sue everybody. Thus, the practice was split off into a separate sector, inflated by a lot of dodgy blow-ins and its professional character vitiated. The current ethics-free culture was thus established during the 1990s.
There’s a decent sub-set of real estate agents who are prepared to cater to bank interests at the expense of foreclosed customers by declining to advertise foreclosed properties properly and, ultimately, selling such properties under value.
Then there’s the judiciary itself. The problem that bank victims have in court would fill a fat treatise. One of the great lies is that banking-related litigation metes out justice to the litigants.
A key banking law text claims (Tyree & Weaver’s Weerasooria's banking law and the financial system in Australia, 6th edn, 2006: p488) that the lender-borrower relationship
'... is based on contract and the parties deal at arm’s length, with no obligation on either party to act with any higher duty to each other than that required by the law of the marketplace.'
And the law of the marketplace? The law of the jungle, as decreed by the High Court’s then Chief Justice Murray Gleeson in ACCC v Berbatis (HCA 18, 9 April 2003). According to Gleeson, the more powerful party (the bank) has not merely the right to exploit its power against the weaker party but an obligation to do so.
Suffice to say, judges regularly preside over cases involving banks that they have previously acted for as barristers and/or with whom they currently have a banking relationship. And, unlike politicians, there is no register of judges’ pecuniary interests. The practice of "judge shopping" – possibly rare, but real – remains unexplored territory.
I have provided a partial list, with brief commentary, of significant banking litigation and outcomes since the 1980s here.
No banking royal commission could be adequate without including the longstanding asymmetric role of the judiciary in enhancing bank power over borrowers. Horror! Which means, of course, that no royal commission worth its salt could possibly get to the root of the matter in a mere twelve months.
APRA (Australian Prudential Regulation Authority) cares only about the stability of the financial system (that is, the profitability of the banks and so on), to the neglect of its victims.
ASIC denies it has a mandate to act for individual bank victims, who it regularly tells to go away and consider litigation in the courts. This, in spite of the existence, since August 2001, in the ASIC Act of s12C (business to business unconscionability in financial services).
FOS (Financial Ombudsman Service), on all but minor cases, is de facto an arm of the banks. The banks finance FOS, so why shouldn’t the former get value for their investment? FOS’ complicity has been totally ignored by the mainstream media.
In a bid to divert pressure for a royal commission, the Coalition promised, in its 2017-18 Budget package, a one-stop Australian Financial Complaints Authority. The idea has, from the start, been criticised. Who will fund it? Who will staff it? Of course, the proper development of such a body would necessarily involve a close examination of what is and is not working with the three organisations that AFCA is supposed to replace. That won’t happen. One can be certain that the Coalition Government will never confront the failings of FOS. More political grandstanding.
A summary to date
My submission pays particular attention to the otherwise neglected significant issue of the perennial lack of justice for bank victims in the courts. As above, for a royal commission to include that dimension into examination will open a huge can of worms. Hayne’s Commission, helped by a restricted terms of reference, will strive to exclude this dimension, but such a discretionary exclusion will transparently highlight that it is not there to root out and deal with the problems before it.
* * *
At the beginning of this article, I canvassed some “naysayers” against the worth of the Banking Royal Commission. Other arguments have been posited as to why it will be positively counter-productive.
“The roof will fall in” brigade
First, it will be inhibiting to bank resilience, detracting and expensive, say bank “analysts”.
A royal commission impacts the entire sector's ability to reprice mortgages to offset pressures, which is negative for all banks … It will likely lead to further compliance spend from the banks and will also become a distraction for management which can also impact profitability.’
Well dear, dear. Given that the banks brought it on themselves, so what?
A letter from John Landels in the Sydney Morning Herald (29 November 2017) already cited in part one, elicits two complementary arguments:
A government-sponsored commission into our banking system will be regarded by the international finance community as a vote of no confidence in our banks and will question the integrity and the very soundness of our banks. It will inevitably lead to higher wholesale borrowing costs, reduced profitability and higher interest rates.
Not only will that affect the hundred of thousands of Australians who are shareholders in banks and rely on their dividends, it will also affect the savings of every Australian who is a member of a superannuation fund. Every fund is a major shareholder in all our banks.
We pass over the bizarre notion that a Royal Commission will “question the integrity” of the banks.
Thus the second claim. A Royal Commission will destabilise the financial sector, global financial markets will naturally react badly, with an inevitable rise in the cost to Australian financial institutions raising essential funds overseas.
One had the impression that “global financial markets” (GFMs), promulgated perennially by their public relations armies, were all-knowing, all-seeing. Why haven’t these players already factored the accumulated crimes into their data sets and pricing mechanisms?
Apart from the myth of omniscience, the reality is that GFMs are part of the problem. The landscape is ethics-free. And where is the logic between bank malpractice and GFM pricing, given that the Australian banks have been consistently generating world-beating mega profits year after year? In short, who gives a rat’s arse about the GFMs when it’s a matter of cleaning up the Australian financial sector?
And the third claim. All of us, whether directly or through our superannuation funds’ investment, benefit from financial sector profits. A TV advertisement financed by the Australian Banking Association has been pushing that line to summer TV viewers.
Investors in tobacco industry companies benefit from their profits. But what are they doing investing in the tobacco industry, complicit in an indisputably criminal activity?
Many of us, typically, courtesy of our funds' managers, are beneficiaries of the takings of bank illegality. This is the point of “green” investment portfolios. Get ethical or get out. Direct bank shareholders have been happy to rake in the dividends year after year, possibly also the capital gains, while declining to look under the bonnet. The era of considered neglect is over.
Finance sector parasitism
There is a deeper dimension to the general populace’s supposed benefiting from bank bad behaviour. The point is well made by bank critic Andy Schmulow in the Sydney Morning Herald (30 November 2017) — simply, the financial sector is a parasite on the rest of the economy:
‘… such high profitability involves gouging every borrower in this country. Every individual. Every business. Your super will suffer: Nonsense. By being the world's most profitable banks, they reduce profitability across every other Australian business. Those "other businesses" constitute the bulk of every super fund's investments. It's like petrol. Increase the price and yes, petrol companies make more money, but every other business makes less.’
Quite. Bank share ownership is delivering us booty from other sectors, which lowers the returns from those sectors to that same retirement package.
One can also speculate that a member of one’s extended family has a foreclosed business or farm, is unemployed, on welfare payments or on the public pension because of bank predation against other sectors, which lack contributes to community deprivation. Put all that on the debit side of the ledger.
I have been pushing the crude statistics on this matter for some time. Witness my article on “financialisation” of economies, originally in New Matilda, in June 2010 (note the cached table).
After the financial year 1980-81, the year of the Campbell Report and the beginning of financial deregulation in earnest, finance sector income was 5% of corporate income and 3% of total business income.
After 2016-17, the figures have climbed to 23% and 16.7% respectively. At the March quarter 2016, the figures peaked (for the moment) at 25.1% and 17.9%. That is, almost a quarter of corporate income and a sixth of business income is taken by the finance sector. (The figures are from ABS, Australian National Accounts, National Income, Table 7).
The lender-borrower relationship
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will not get to the root of the problem unless it confronts the nature of the relationship between bank lender and small business/farmer and investors in retail housing or through bank “wealth management” services.
The lender-borrower relationship, especially for small to medium farmer-borrowers, is highly asymmetric. The bank lender holds all the cards. I have covered this issue briefly in my submission to the 2017 Senate Consumer Protection Inquiry.
The credit contract is a complex instrument — in particular, it is open-ended. The open-ended contract is of extended duration, and its terms are subject to alteration. Some legal academics have termed such an arrangement an “incomplete contract”. The employer-employee relationship has long been acknowledged as such an animal, leading to the establishment of separate jurisdictions and specialist expertise. To a lesser extent, but appropriately, it has been applied to the franchisor-franchisee relation.
Legal scholars, to my knowledge, have failed to apply the idea of an incomplete contract to the lender-borrower relationship and to elucidate its significant regulatory implications. The formal education of the legal profession, from which is drawn the judiciary, is centred on the holy writ of the law of contract as if the lender-borrower relationship is akin to the one-off exchange of a pallet of potatoes. Scandalous really.
With such an inbuilt asymmetry of power, the bank lender cements its leverage in the contract terms. Fundamentally, the bank seeks to shift the inherent risk associated with any credit contract wholly to the borrower. The taking of security on borrower assets, enhanced by borrower (or related party) guarantees, is the basic means by which risk is shifted.
Other control mechanisms put the borrower under further subjugation that extends into the realm of unconscionability and fraud. The Australian banks have used this full range of mechanisms over a long period of time with complete impunity.
Mechanisms that fit into this category include:
• withholding of the full completed contract from the borrower;
• “suspension” and “preservation” clauses in a contract that subordinate borrower litigation rights to bank discretionary plunder;
• contracts repayable at call (the standard overdraft contract, but on occasion term loans);
• unsuitable loan facilities, (as below);
• usurious penalty interest rates and other discretionary fees;
• “non-monetary” defaults — where the lender decides arbitrarily that the industry in which the borrower operates is subject to (or likely to be subject to) market deterioration, and defaults the borrower on that account;
• customer asset devaluations — where a lender obtains from a compliant valuer a significant devaluation of customer assets, leading to an unacceptable loan to valuation ratio which, in turn, provides the bank with a “legitimate” cause for defaulting the customer; and
• the sale of foreclosed customer assets undervalue.
A key dimension of the asymmetry of the lender-borrower relationship, especially involving small to medium enterprise (SME) farmers, is the imposition of not ideal loan facilities on the borrower. The bank, by virtue of the short-term nature of the bulk of its funds, prefers short-term facilities. The SME farmer borrower, lacking access to sufficient equity, prefers medium to long-term facilities.
The bank’s preferred option these days is the bill facility — a facility developed for corporates and pushed into other business domains. The bill facility – never adequately explained and which few SME farmer borrowers understand – has to be turned over regularly within fixed timelines. This turnover requirement allows the lender to alter the terms of the bill on a regular basis.
In addition, interest on the bill and fees are paid up front. The family farmer is at a particular disadvantage, with seasonality of revenues and uncertainty linked to weather patterns. Farmers and SMEs will be forced to take out fixed-term bills that don’t match their income and expenditure flows — meaning that they will be paying interest and fees on unused funds. Borrowers are also forced to manage their pool of bills that expire at different periods.
The bills will be accompanied only by a minimalist overdraft. The bill facility, “sold” to the customer as providing maximum customer convenience, has been anything but.
Before the banks’ blanket pushing of the bill facility, the overdraft provided significant flexibility. Farmers, say, with a $100,000 overdraft limit, might have a hardcore debt of $25,000 and a great margin of flexibility to confront income to expenditure variation. Interest was paid on actual debt and belatedly.
During the 1970s and early 1980s, the NAB reduced the overdraft interest payment periods from six months to three months, and to one month in 1983. The bank also dramatically reduced overdraft limits and eliminated the previous margins that facilitated borrower flexibility.
These changes were being imposed at precisely the time when rural “experts” were advising farmers to “get big or get out”. Coupled with the massive interest rates of the 1980s, one can readily see why the number of family farmers collapsed between the 1970s and 1990s.
The typical bank loan facilities for SME farmers are thus not fit for purpose. They are in themselves a vehicle ripe for predatory lending.
Lending establishments that catered specifically to farmer needs have been abolished or privatised (see below) in the post-Campbell Report era of financial deregulation. The perennial rationale offered has been that private sector providers, via competition, will service all borrower needs. A huge lie of course, as the de facto banking cartel, makes loans to small business and the farming sector on its own universally onerous terms. Such borrowers now have no alternative.
The category of predatory lending deserves greater exposure, now generally hidden from view. Bank lending officers may ascertain that a small farmer borrower or retail housing investor does not have a viable proposition for sustainable principal and interest repayments. Yet they take security and plan, ab initio, to default and foreclose when the irregularity of payments inevitably arises.
This practice is widespread, an integral part of the banking trade. In the retail housing investor domain, predatory lending (especially to “asset rich, income poor” older people) was exposed in the Storm Financial scandal. It is the speciality of the Banking & Finance Consumers Support Association’s Denise Brailey. In discussions with me, Brailey insists, given the information gathered from those who contact her for assistance, that the practice remains an underreported racket in Australia.
The bank (typically a “reputable” household name) plays gangster, weaponising its licensed banking operations. Facilities are oppressive, the full contract is withheld from the customer, customer details are fabricated, signatures are forged and so on.
Royal Commission personnel will receive countless instances of bank malpractice against customers. I suspect that what will not happen is a forensic pursuit into the proximate causes and root cause of this extensive malpractice — save, perhaps, for an attribution to some vague notion of a dysfunctional culture which has arrived from sources unknown. The heavies, uncharacteristically, have already pronounced on the problematic “culture” in 2015, with no impact whatsoever. Hot air — which serves as an end in itself.
The institutions to offset the asymmetry of bank power are themselves negated
Ironically, the asymmetry of power between bank lender and borrower/investor has been acknowledged in the establishment of various institutional arrangements to partially moderate overarching lender power.
Such has been the case with the rise of Equity courts paralleling Common Law courts in English law — in which the dominant party’s abuse of power in its pursuit of naked self-interest is constrained under the rubrics of “fiduciary duty”, “duty of care”, etc.
Such has been the case during the 19th Century and early 20th Century of development of alternatives to private profit-oriented banking — mutualist credit unions and building societies, and government-owned banks.
Such is the case with:
• the establishment of the Code of Banking Practice in the 1990s;
• an “External Dispute Resolution” mechanism — beginning with the Banking Ombudsman in the late 1980s, now the Financial Ombudsman Service;
• the creation of ASIC out of ASC in 1998, to provide more comprehensive oversight for vulnerable financial services consumers; and
• farm debt mediation services in several States.
All these institutions have been successfully neutered, evidently not by accident.
Regarding the courts, a key Australian banking law text (Tyree & Weaver, Weerasooria's banking law and the financial system in Australia, 2006, p.488) claims (to repeat the quote already cited above):
‘[The lender-borrower relationship] is based on contract and the parties deal at arm’s length, with no obligation on either party to act with any higher duty to each other than that required by the law of the marketplace.’
The law of the marketplace being the law of the jungle, the courts will continue to act on the presumption that parties to a credit contract are necessarily outside the domain of equity, and indeed outside the domain of unconscionable conduct.
Government-owned banks have been privatised or abolished — given “legitimacy” by the 1979 Campbell Inquiry. Only a handful of mutualist credit unions have survived the powerful ideological pressure for demutualisation and privatisation.
With regard to rural sector specialist banks, the iconic Commonwealth Development Bank (another SME lender) was abolished in 1996. The Primary Industries Bank Australia (PIBA) was sold off to the Rural & Industries Bank of Western Australia (R & I Bank) in 1987-88 — a cynical measure by Federal and State Labor governments with the R & I Bank on its way to privatisation as Bankwest. PIBA’s loan book was subsequently sold to Rabobank in 1994. The Australian Wheat Board’s Landmark was sold to ANZ in 2009. And the Victorian Rural Finance Corporation was sold to Bendigo and Adelaide Bank in 2014.
The Code of Banking Practice has been a sham from the start. I outline briefly the Code’s history in a 2013 article on the Priestleys v NAB. In particular, I highlight the transparently corrupt moment in 2003 when small business is belatedly incorporated into the Code only to have the banking cartel devise a means to secretly render the Code inoperative.
The Code has been modified since 2003-04. In a seminal judgment in March 2015, NAB v Rice, the Code has been reified as having contractual status. But, in my opinion, the Code remains as a public relations exercise with minimal impact on bank behaviour.
Regarding the Financial Ombudsman Service (FOS), on other than minor disputes it is either incompetent or corruptly complicit with its bank funders. I have outlined this charge in my submission (no 295) to the 2013 Senate Economics Committee ASIC Inquiry, and in my submission to that Committee’s 2017 Consumer Protection Inquiry.
The newly created ASIC was handed powers over unconscionable conduct in financial services, incorporated in the Act’ s s12C. Following a Parliamentary Inquiry and report appropriately titled 'Finding a Balance: towards fair trading in Australia', an amendment covering “business to business” unconscionable conduct (that is, corporate predation over SME farmers) was inserted as s51AC in the then Trade Practices Act. Coverage of such unconscionability in financial services was separated out and handed to ASIC in an expansion of the Act’s s12C in 2001.
ASIC has aggressively denied its responsibility in this crucial arena. In July 2004, Alan Fels, chairman of the Trade Practices Commission (ACCC) during 1991-2003, claimed that the relocation had been a disaster and urged that unconscionability in financial services be handed back to the ACCC. Thus there is no action against such abuse, in spite of the formal existence of a legitimating statute.
In addition, ASIC also has formal oversight over FOS, has done nothing regarding FOS’ partisanry and is complicit in FOS’ complicity with bank malpractice.
‘It has levelled the playing field from being heavily in favour of the banks to giving farmers and people on the land some semblance of a fair go.’
Unfortunately not so. The Act was subsequently weakened and the banks have subverted the independence of the mediation process.
The point here is to make a novel observation. Structures are established specifically to offset the banks’ preponderant power but are, over time, systematically undermined. This undermining across all these arenas is transparently a strategic act. The banks’ intrinsic power is being dynamically reinforced and reproduced as a matter of principle. Thus is a mafia at work to perpetuate crimes against financial sector customers and to inhibit redress against those crimes.
As with the character of the lender-borrower relationship, will this significant supplementary dimension be grasped by the Royal Commission personnel? One expects not.
* * *
When did it start?
On 1 December 2017, Fairfax’s indomitable columnist Adele Ferguson reported Prime Minister Turnbull’s calling of a banking Royal Commission. The article was accompanied by a timeline headed 'Where it all began'. Peculiarly, the first entry is for 18 June 2013, with Ferguson then reporting on allegations against a Commonwealth Financial Planning Ltd’s financial planner — here and here.
The problems begin decades earlier. My collaborator John Salmon’s memory of deterioration of standards at the National Australia Bank (he began there in 1950) is recounted (p.4) in my 'Illusion & Reality at the National Australia Bank Part II, July 2011'. At least at the NAB, malpractice takes off during the 1970s. But the 1980s – the decade of financial deregulation – is when malpractice explodes for the entire banking sector.
There is Treasurer Paul Keating’s 1991 Martin banking inquiry, designed and manned to head off protest at the pass. The massive whitewash inquiry process and report merely enhanced bank victims’ frustration and rage — a phenomenon simmering now for close to 40 years. This Royal Commission has been a long time coming.
The root of the problem
The root of the problem is the profound asymmetry of the bank / customer relationship. The bank has preponderant power over the customer and power corrupts.
But if the problem is structural, why hasn’t malpractice always been a systemic problem? I asked John Salmon about his experience at the NAB during the post-War (highly regulated) years. He noted that “things were radically different then”. Banking employment was essentially a lifetime career. There were youthful apprenticeships, with senior management being promoted internally — fostering procedures familiarity, company loyalty and integrity. There was considerable training. A plethora of procedural rules prevailed. Lending criteria were strict and tightly controlled.
As noted, that system was breaking down in the 1970s, directed from the top. 1980s deregulation and changing personnel practices mean that that post-War structure is irredeemably gone forever.
But how to install a means that gives protections to various vulnerable customer groups given the innate structural problem? At the moment, the issue is superficially referred to as a problem of the appropriate “culture”.
I don’t have the answers for this fundamental problem. But a compulsory step is to have authorities understand and acknowledge the nature of the beast. The authorities are not even close to acquiring this understanding. Rather, recent regulatory moves, under extreme popular pressure, remain in the “deckchairs on the Titanic” department.
Compare the asymmetry in the medical profession — the structural subordination of the individual in need of advice, direction, assistance and remedy from medical practitioners. Although that imbalance perennially is of minor consequence, on many occasions it is a matter of deadly serious consequence.
Medical malpractice has its own regulatory failures. But medical practitioners do get investigated and struck off for malpractice. Compare the financial sphere. The odd token financial planner gets banned (even then only for a number of years). Being a corporate sphere, senior management is immune, as are most culpable lending officers. At the moment, I have knowledge of a couple of criminal spivs operating with impunity (from senior management as well as from authorities) who merely shift their location between major banks as the going gets hot — going from the NAB to Westpac and back to the NAB again.
Surprisingly, in November 2017, it was reported that 20 bankers within the NAB had been 'terminated, or were no longer employed by the bank'. Thirty others lost their bonuses — what a penalty! This is a very rare case of cleanup generated from within and is totally uncharacteristic of NAB behaviour. Traditionally, errant loan officers are discretely placed elsewhere in the institution until the issue has disappeared from public view. In this instance, given the scale of the enterprise deemed to be systemically at fault (mortgages to foreign nationals via “introducers”) the setup would have to have been devised, established and condoned for some time by senior management. It appears that those retrenched have been the sacrificial lambs paying the price for sins committed higher up the seniority chain.
“…we have no tolerance for bankers not following processes."
Yet, in July 2016, Hagger presided over the merger of five NAB super funds into one, forming Australia’s largest retail super fund, at $70 billion. The ebullient Hagger claimed the benefits of an overdue cleanup of the sector, with capacity for greater competition, etc.
However, super fund analyst Phillip Sweeney claims (in copious correspondence with the authorities) that the consolidation merged quite different funds, involving 1.3 million members. The merger was effected without the legally necessary procedures (as claimed by Sweeney to the Chair of a Parliamentary Committee in March 2017) — that of 'a statutory duty as well as a general law duty to execute a Participation Agreement (Deed) with the “successor company” of an occupational pension scheme …'. No such process took place, and the relevant documentation has been withheld from interested parties. Sweeney estimated that the top down change could involve a loss to members of up to $761 million per annum.
When NAB staff were preparing the 5-into-1 super funds merger, they discovered several peccadilloes of operational misconduct. The bank came clean and arranged the payment of $36.5 million in compensation to life insurance claimants and super fund customers. Sweeney contrasts the big-noting of the NAB regarding this affair with the complete secrecy regarding the large scale illegal scam that stands to net hundreds of millions of dollars from super fund clients on a permanent basis.
Sweeney has also estimated that the Big 4 “for-profit” super funds have recently taken in an aggregate $17 billion per annum and, via related party distribution of funds and excessive fees, have siphoned off $7 billion of this sum (of which $2 billion by the NAB) for higher profits and thus for its shareholders — what Sweeney labels a “profit capture model”. Of government-mandated contributions going to big bank for-profit super funds, approximately 40 per cent is being siphoned off to bank shareholders. This is legalised plunder on a grand scale.
Sweeney also claims that ASIC and APRA ignore their legal obligations for oversight, and are complicit in this scam and in the related denial of access to documentation.
In addition to comprehending the essential nature of the beast, a complementary compulsory step is to take seriously, rather than offering lip service, white collar crime procedures in which the penalties fit the crime — the absence of such a link over recent decades constituting a farce.
In May 2017, in one of the myriad schemes cooked up by the Coalition Government to head off a banking Royal Commission, Treasurer Morrison announced the establishment of a “Banking Executive Accountability Regime” (BEAR). Borrowed from a British development, the aim is to have the banks to develop “a map of the roles and responsibilities” of senior executives, ultimately so that adverse behaviour of the bank over which they preside can be attributed to its source. APRA is designated as the policeman.
There is something desirable in this move as a matter of principle, with the need to cut through the jungle that mediates the complex relationship between key decision-makers, initiative-takers, order-followers and outcomes. But BEAR could be yet another form of window dressing. Breaches are formally to be met by fines only on the organisation, with no charges made on the responsible individuals. Moreover, APRA has shown itself utterly complicit with bank malpractice, with every indication that there is no prospect of it acquiring intent to effect its legal responsibilities. Who is to watch over the watchdogs? There are no such bodies.
At issue, behind the root of the problem is the entire structure and its ideological cover put in place since the 1980s. There has been no mea culpa from successive generations of anybody in authority that the utopian benefits claimed by deregulation and privatisation advocates, and implementers might have been overly optimistic.
Fred Argy, Treasury bureaucrat and Secretary to the Campbell Committee and key author of the 1981 Campbell Report, briefly expressed concern in April 1995 as to how his baby had developed into adulthood. Yet he defended the overall Campbell agenda and minimised potential policy discretion to offset dysfunctionality. He remained captured within establishment economist verities and his muted criticism disappeared immediately into the ether.
There has been one strong critic — and that surprising. John Hewson was, in the 1970s, adviser to Treasurer John Howard and a key figure in motivating Howard to establish the Campbell inquiry in January 1979. For a period, Hewson wrote a weekly column in the Australian Financial Review and, on several occasions, he decried the financial system’s anti-social character.
Thus, under the title 'Bankers have no shame' on 13 August 2010, he wrote:
'As one who has spent much of his professional life fighting for deregulation and reform of our financial system to give our banks many of the freedoms and structures that they now enjoy, I am embarrassed that I have contributed to breeding this sort of arrogance and behaviour.’
Since Hewson’s eclipse as Liberal Party leader in 1994, his opinions carry no weight. To date, nobody who carries political weight has expressed a similar sentiment.
Everybody in authority and in opinion-making circles is captured by the same dysfunctional mentality, in which an understanding of the root of the problem is rendered impossible by construction.
By default, the pressure for a banking Royal Commission, and a root and branch cleanup of the sector, had to come from below.
A note at the end: document discovery
Court litigation proceeds on the basis of the material available to the litigants and the judge/s. In litigation involving banks and their customers, the bank has always been concerned to prevent the availability of any bank documentation that supports the victim’s case against it. In legal parlance, they try to avoid “discovery”.
Banks will claim that they have mislaid key documents demanded, or that they have destroyed them because of the lapse of time. Thus highly paid grownups argue “the dog ate my homework” ruse.
In the late 1980s Somerset/Kabwand case, the NAB, in league with its establishment solicitors Thynne + Macartney, claimed that vital documents requested had been lost in a flood. Two weeks later, a senior bank staffer, wanting absolution from a cover-up, admitted to the existence of the documents.
In one recent case with a twist, when the NAB advanced funds to a woman’s errant partner without her knowledge and then claimed that she had guaranteed the loan (and thus was liable for the debt), the NAB claimed that the (non-existent) guarantee document had been lost by the NAB’s then record-keeping company Iron Mountain. To repeat: the NAB claimed that it had lost a document, not because it was harmful to its own case (the usual scenario) but because it insisted on the existence of a document which did not exist. Brilliant!
Often the existence and pertinence of particular documentation is unknown to the victim, a situation where a consultant experienced with banking procedures is necessary to highlight what is required in discovery.
Sometimes, a bank will dribble discovery over a period of time, or occasionally discover key documents at the eleventh hour (Friday night at 5.30 pm for a Monday hearing), strategically putting the victim/s and their legal team in complete disarray. In the Somerset/Kabwand case, lending officer diary binders containing what was known as the “duplicate running sheets” (diary duplicates) were handed over, without affidavit cover, after the trial had commenced, on the Saturday mid-way between the two week trial hearing. Lacking affidavit cover, these key documents could not be used to interrogate bank staff in court.
Bank loan officers have been required to create considerable paperwork as a background for an establishment of the contractual relationship. Where such paperwork exposes bank officer neglect or duplicity, a bank may fabricate false meeting diary notes, etc, and “discover” these fabrications in litigation. Diligent discovery, especially if ordered by the court, may uncover telling discrepancies between original documentation and the forgeries. Thus was the case in Nobile (& Martelli) v NAB Qld FCA 143, 11 May 1987, and in Somerset/Kabwand v NAB, QSC, 29 September 1988 (judgment withheld). In the latter case, belated close scrutiny exposed that the key lending officer had reconstructed records as part of a fraudulent process. The judge decided for the guarantors in Nobile, but the judge ignored the document fabrication (and associated fraud) in Somerset/Kabwand.
Unfortunately, judges have perennially been complacent with the penury of bank discovery, thus being complicit with the denial of key documents that could in principle swing the trial in the victim’s favour.
I bring up the issue of discovery here because a Royal Commission is endowed with full powers of discovery. This is a key power that Parliamentary Committee inquiries lack. Thus, we have had myriad parliamentary committee inquiries into bank malpractice and regulatory failures, and little comes of them. Bank executives lie at will to committee members at hearings without retribution.
For example, the documentation relevant to the CBA’s purchase of Bankwest from HBOS in December 2008 is extremely pertinent to the CBA’s default and foreclosure of close to 1000 Bankwest borrowers around the period of purchase. Bank executives claimed at inquiry hearings that everything was above board and known, in spite of victim claims, but parliamentary committee members had to let the issue go through to the keeper.
It is now incumbent on the Royal Commission staff to subpoena all documentation relevant to that purchase. Documents relevant to the CBA’s contemporaneous foreclosure of Storm Financial could do with comparable forensic investigation.
The relevance of discovery is highlighted by cases of significant corporate malfeasance in the U.S., brought back into visibility following the publication of a biography of the judge involved. The judge was the mild-mannered Minnesotan Miles Lord.
Book reviewer (and corporate crime watcher) Russell Mokhiber notes:
‘Judge Lord was known for confronting corporate executives face to face for their corporate crimes and other wrongdoing — most notably the executives of A.H. Robins Company, the maker of the Dalkon Shield, and Reserve Mining, the company that dumped 67,000 tons of waste tailings a day into Lake Superior for more than a decade. I am not anti-corporation, but I am anti-hoodlum, anti-thug, anti-bank robber and anti-wrongdoers,” Judge Lord said. “Some of these wolves wear corporate clothing.”’
Quoting Lord’s biographer Roberta Walburn:
‘As a judge, he would often sound more like a preacher than like a judge. He believed in the goodness of people, but that good people did bad things if they were in a corporation where the pressures were on them to sublimate their individual responsibility to the corporate entity — a corporate entity that had no heart, no soul and no conscience. He believed that if he could break down the corporate walls and talk person to person to the corporate executives that he could convince them to change their ways. He was always trying that.’
These comments could serve as a leitmotif for the current drive against a refractory financial sector and the “regulatory” bodies that give it sustenance.
In the Dalkon Shield case, Lord struck it lucky with a whistleblower. The insider documentation saved the reputation of the courageous Lord and ultimately destroyed the unrepentant company. Alas, whistleblowers are unhappily rare because of the attacks and suffering they experience from their actions. In the current situation, the Royal Commission, with its powers, can demand documentation and process its implications, supplanting the requisite army of whistleblowers.
In the meantime, in league with their own army of bent lawyers, one can surmise that the banks are furiously shredding incriminating documentation by the truckloads.
Hopefully, the exposure of long term bank criminality by the Royal Commission will be the best entertainment available in the coming year.
Dr Evan Jones is a retired political economist.
This article is an edited version of a 4-part series published on Independent Australia, between 8 December 2017 and 8 February 2018.