Treasury ASIC Enforcement Review - Submission - Reforms to strengthen penalties for corporate and financial sector misconduct – Draft Legislation - Dr Evan Jones
The federal Treasury is currently overseeing legislation to amend various Acts to strengthen the penalties for white collar crime. In principle, this is an important process. It follows from the 2014 Murray Financial Systems Inquiry and report, which recommended higher penalties for misconduct against financial retail consumers. The 2017 Senate inquiry and report into penalties for white collar crime, albeit generally neglected, implicitly reinforced the process.
Responsibility for the regulation and supervision of the Australian financial system is vested in four separate bodies – the RBA, APRA, ASIC and the Treasury. Of the four bodies, the Treasury is the least visible, not least because its role is more indirect. But, given the relative autonomy of the other three, Treasury is a key means by which the government of the day can direct systemic policy changes.
Yet Treasury has generally been invisible during the entire period since the landscape was changed with near comprehensive financial deregulation during the 1980s. With the December 1983 dollar float as a fact and the disappearance of John Stone (who strongly opposed the float) as head in 1984, Treasury has been a repository of full ideological commitment to the deregulated regime. This in spite of the fact that 'bank incompetence and malpractice took off' from day one of the deregulated era.
Treasury, with the RBA, oversaw the disaster that was the high interest rate regime of the 1980s, culminating in the catastrophe of the early 1990s recession. A key figure implicated in the incompetence, Treasury Deputy Secretary David Morgan, then moves straight into the utterly discredited Westpac in 1990, becoming CEO during 1999-2008. Ted Evans, also Deputy Secretary during the disastrous 1980s, became Secretary in 1993 until 2001, immediately following which he became a Westpac Board member then Board Chairman 2007-2011.
With this ex-public service infusion, Westpac was not at the top of the bank malpractice charts (NAB shared the lead with CBA), but it continued to ignore its own victims, not least the continued vendetta against its 1980s foreign currency loan victims. In general, Westpac did nothing (save for a token pr-inspired ‘corporate social responsibility’ push) to further banking sector reform regarding customer treatment.
The Morgan/Evans example has been followed by ex Treasury Secretary Ken Henry (2001-2011), joining the NAB Board in 2011 and becoming Board Chairman in 2015. Ongoing disclosure of NAB victims’ experience highlights that Henry’s presence at that bank has made no discernible difference to its operations to date.
And what does the career trajectory of Morgan, Evans and Henry say to the current crop of Treasury officials regarding their Department’s role in banking regulation?
The behind-the-scenes impact of this evolution is embodied in the appearance of the two most senior relevant Treasury officials, Jim Murphy and Ian Beckett, at a hearing of the Senate Post-GFC Banking Inquiry on 8 August 2012.
Murphy and Beckett proceed to say or imply that the extent of the casualties of the financial system is overstated, and that those they know of (in particular, the Bankwest borrowers foreclosed by the CBA) were a natural product of the cleansing power of market forces. Moreover, this was nothing to do with the Treasury, as ASIC was the active regulator. But, at the same time, they admitted that ASIC’s power to check abuse is limited by judicial culture which also adheres to the principle of market forces. But ultimately, the courts are the rightful arbiters of what is right and just. End of story.
I deal with this caustic environment, immensely frustrating for the victims, at length in a series of articles in 2016 that followed yet another banking inquiry on the same matters.
It is pertinent that at the very same hearing on 8 August 2012, there also appeared Denis Brailey, expert on the sphere of predatory low doc loans, and one prominent CBA Bankwest victim Sean Butler.
Butler’s testimony is available on youtube here. The Treasury officials apparently learned nothing from these witnesses.
But here is Treasury with carriage of amendments to strengthen white collar crime penalties.
My submission makes three points.
1. ASIC already has legislated responsibility for business to business unconscionable conduct. It has pursued no malefactors under the relevant provisions. Hence, the problem is not merely the strength of the penalties but enforcement.
2. The sections of the Acts that the Amendments Bill proposes to strengthen regarding penalties are irrelevant to most of the crimes perpetrated by banks against its victims, as have been partially exposed by hearings of the Banking Royal Commission. There is a severe disconnect in this regard.
3. The ultimate object should be to send bank senior executives to prison, and to work back as to how this object can be achieved.
Here follows the submission.
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I have been receiving information from victims of bank malpractice since 2000. I use the word ‘victim’ advisedly. I thus have an atypical knowledge of the nature and extent of bank malpractice against its borrowing customers (particularly small business and family farmers, but also unclassifiable mortgage borrowers).
These victims perennially complain about the assertive inaction, indeed complicity, of the financial regulators and the mediation services with the banks.
ASIC, as is now well known, has a sorry track record.
ASIC’s key Achilles heel, amongst others
The strength of a penalty regime is only meaningful if legislation and regulations are enforced.
Ignored amongst the publicity regarding ASIC’s failings is its parlous record on unconscionable conduct in financial services with respect to borrowers.
The Reid Parliamentary Inquiry produced the atypically bipartisan 1997 report Finding a Balance: towards fair trading in Australia. From that report, the Howard Government legislated s51AC (business to business unconscionable conduct) into the TPA in 1998.
In August 2001, following Wallis, an amendment of the ASIC Act moved the equivalent of s51AC with respect to financial services into the ASIC Act as s12CB and s12CC – effective early 2002.
What has happened since then? Nothing.
In late 2003 or thereabouts, Michael Quinlan on FindLaw commented on the potential impact of new legislation, including s12CB and s12CC, and judgments on the new 2003 Code of Banking Practice (which, as it happens, was strategically neutered at birth by the banks themselves). He notes:
“It is only a matter of time before the extent of this provision is considered by the courts. … Whether by way of statute or in contract, the conduct of creditors in their dealings with their debtors is subject to increasing scrutiny. Notwithstanding that debtors may be well-advised commercial entities, the aggressive, self-interested pursuit of creditors' rights is open to greater risk of being challenged.”
It hasn’t happened. It hasn’t happened because ASIC has ignored, evidently strategically, its legislated obligations for s12CB and s12CC.
One notes that ASIC staff must be aware of the existence of s12CC. ASIC took Westpac to court regarding alleged manipulation of the BBSW. Beach J (atypically astute amongst the judiciary on banking matters) decided for ASIC in May 2018, citing s12CC.
Yet ASIC staff have spent the entire period since 2002 denying to victim complainants that it has any authority to pursue banking unconscionable conduct (and that of associated parties such as receivers) against business borrowers.
This is a longtime scandal. One that has received zero publicity. My efforts in bringing this matter to light in various inquiry submissions have been ignored.
I am in possession of a number of letters sent by ASIC staff to victim complainants. These letters (in which there are variations on a standard form component) lie to the complainant regarding ASIC’s powers and responsibilities. They lie to the complainant regarding how ASIC staff approach cases such as those brought by complainants (‘We only deal with cases of system-wide significance, which yours isn’t’, etc.). They perennially conclude by recommending to the victim (typically penniless after default and foreclosure) they take themselves to court and pursue litigation there.
I reproduce below several paragraphs from my August 2014 submission to the Murray Financial System Inquiry:
« Here is an excerpt from ASIC personnel (designated ‘Senior Executive Leader Stakeholder Services’) to a Melbourne-based Bankwest victim, dated 30 June 2014:
“As you may know, ASIC regulates the conduct of lenders and external administrators under the laws we administer, and we appreciate receiving reports of misconduct from members of the public about the people and entities we regulate. … However, ASIC generally does not act on behalf of individuals or businesses with respect to their private or commercial disputes. There are limited regulatory arrangements enforced by ASIC for commercial lending activity. ASIC’s role is limited to administering the consumer protection provisions in the Australian Securities and Investments Commission Act 2001 (ASIC Act).”
« Atypically, this letter goes on to acknowledge (albeit in language so cryptic that its meaning would be missed by the ill-informed victim) that the ASIC Act extends to small business and misleading and deceptive conduct and unconscionable conduct by lenders. The letter then notes that the Courts ‘impose a high evidentiary bar’ in these matters (the only display of honesty and accuracy in the entire letter), and concludes (without saying so explicitly) that ASIC therefore will not go anywhere near that arena and thus it can do nothing for the complainant. The letter than proceeds to deflect the victim’s complaints about the corrupt activities of Bankwest’s receiver which, claims ASIC (regarding an industry in which corruption is endemic), was merely exercising its ‘commercial judgment’. In short, ‘go away’.
« This letter is not unrepresentative of treatment of SME/farmer complainants – indicating a comprehensive complicity of ASIC with corporate malfeasance in the financial services sector. The state of play is a disgrace.
« Note that the recent Senate Inquiry into ASIC comprehensively ignored this dimension of ASIC’s failure (preferring to concentrate on the CBA’s CFP debacle) …
« If one ignores willful complicity on the part of ASIC personnel with ongoing bank malpractice, with the ongoing refusal to act on the institution’s legislative mandate, one might infer that ASIC personnel lack the intellectual wherewithal to handle matters involving unconscionable conduct against SMEs/farmers. The area, admittedly, is legally demanding, but that is no excuse for inaction. »
I have written to successive former ASIC Chairmen, D’Aloisio and Medcraft. Responses under their names claim that everything is in perfect working order, important reforms are in the pipeline, and that there is nothing to be concerned about. These responses ignored the substance of my letters for meaningless platitudes.
There appears to be a move afoot, not least by the current government, to blame all of ASIC’s failing on the Medcraft era. It is true that in the early days of Medcraft’s reign he was missing in action on an overseas junket. But the attribution alone to Medcraft, being appointed by Labor in May 2011, is a lazy and political act that politicises the problem. The claim by senior government Ministers that the new leadership will readily transform ASIC’s character, competence and actions is ludicrous.
ASIC exhibited comparable sloth and complicity with financial sector miscreants at least under its two pre-Medcraft Chairmen D’Aloisio and Lucy.
It is even arguable that the newly constructed ASIC in 1998 was never the right institution to handle consumer protection equably and efficiently, being built on the narrowly focused and rather erratic NSCS/ASC.
On the matter of ASIC and unconscionable conduct, a highly illuminating exchange took place at a hearing during the Joint Parliamentary inquiry into Impairment of Customer Loans (the second inquiry into the CBA takedown of Bankwest customers) on 23 November 2015. Witnesses on the occasion were three senior ASIC executives – Adrian Brown, Warren Day and Michael Sadaat.
Here is Saadat:
“Generally speaking, ASIC does not intervene in individual disputes in financial services and corporate regulation and is not funded to undertake such a role. The exception is where such action would serve a broader public interest.”
Followed by Day:
“… we have not seen a case where we would say we get involved and will explore or better something or widen the class or the definition of 'unconscionable conduct'. We just have not seen that type of case in what has been brought to us. So, in effect … any case we would take on we would effectively be becoming a form of pro bono lawyer for the individual borrower concerned. We would be using taxpayers' funds where we are trying to get a wider interest for the Australian public.”
Followed again by Sadaat:
“What we would say is that there is scope to establish precedents that have wider applicability, whereas in these commercial contracts, whilst you might get a decision in favour of a borrower in a particular case with particular facts, it is unlikely that those decisions would automatically provide a remedy for other borrowers because whether or not the conduct is unconscionable for another borrower will really turn on the very specific facts of the case, whereas in the consumer space we see much more scope for that wider applicability.”
These claims are complete rubbish, and they were called out by Committee member Ann Sudmalis.
“It is important to note that courts generally impose a high bar when a party is seeking to establish unconscionable conduct in a commercial loan. The courts put significant weight on the enforceability of contractual promises as being central to the conduct of commerce. In making a finding of unconscionability, the courts have generally concluded that some serious moral fault or lack of ethics must be proved. This requires a consideration of legal, commercial and social norms.”
Quite. It is noteworthy that ASIC correspondence with aggrieved victims never admits to this claimed reason for its inaction. Here, senior ASIC personnel admit to being not up to the job. No doubt,
ASIC relies upon this revelation receiving zero publicity (it judged correctly).
It is precisely ASIC’s role to champion individual disputes in the courts because the victims lack the resources to do so. Whatever the outcome, lessons are learned for the more honed pursuit of future litigation.
At the hearing the ASIC trio claim that they have consistently argued for governments to deal with the impasse. Yet in the cited ASIC submissions to various inquiries I can find no evidence for this claim. There is ASIC support for the extension of ‘unfair contract terms’ to SME contracts – a move initiated by others. This development is important but ultimately not central to the criminal character of bank default mechanisms and judicial complicity. ASIC personnel have shown no interest in surmounting the barriers they claim to have inhibited their action in the courts.
The moral of the above? There is no point talking about improving a penalty regime if ASIC personnel decline to enforce the regulatory regime for which they have legislative responsibility and obligations.
Later, Day claims, in responding to a comment by Committee member John Williams regarding a particular Bankwest victim of the CBA takedown after its December 2008 purchase:
“I think there are always two sides to a discussion about that. The lender may have a very different take on some of those statements for their own perspective because they may say, 'I hear that but we had this risk to deal with. We had this risk to deal with.' As I said before, they might say, 'We weren't prepared to throw good money after bad and so we didn't want to take that risk. We're risk averse businesses because we're banks.' I am just hypothesising in that respect. They might say, 'We're not prepared to do that. We just need to get out', and to a certain extent …”
Day and his support staff have evidently failed to pursue even a cursory examination of the evidence supplied by foreclosed Bankwest victims, not least in this reasonably well publicised case. Why not? Day here implicitly admits to complicity with CBA criminality.
It appears that additional senior heads should roll if ASIC is to be transformed into an effective regulator.
Ex-TPC/ACCC Chief Allan Fels has long pushed for responsibility for unconscionable conduct in financial services to be returned to the ACCC. Certainly the ACCC couldn’t do worse than ASIC’s zero batting average in this regard and, in principle, ACCC’s broader coverage of the area should better equip its staff to recognise the nature of the beast.
But even in the ACCC, capacity and intent to act depends heavily on which bodies are running ACCC at any moment. In the early years 1998 – 2001, the ACCC pursued only minnows under its newly-acquired s51AC, and no banks. Worse, when NAB victim brickmaker Sante Troiani sought the ACCC’s assistance (one of the most scandalous cases of calculated foreclosure against a small business customer in Australian banking history), the ACCC replied (3 March 2001):
“… the alleged conduct does not appear to indicate a breach of the Trade Practices Act. I suggest that you consult with your solicitor regarding other courses of action that may be available.”
Current ACCC Chair Rod Sims has, surprisingly given his previous life, taken up the cudgel for small business. This stance is in marked contrast to that of his predecessor, who plumped for the big end of town and the law of the jungle (which is after all why he was installed by then Treasurer Peter Costello, breaking the mould established by that ‘troublesome priest’ Allan Fels). What with the recent appointment of family farmer expert Mick Keogh as Commissioner, it appears that the ACCC is presently certainly better equipped to handle unconscionable conduct in financial services. Responsibility should thus be relocated post-haste.
Appropriate penalties and attribution to responsible parties
The Explanatory Materials document, outlining the substance of the Treasury Laws Amendment (ASIC Enforcement) Bill, is in severe disconnect with the character of malpractice and criminal activity extant within the Australian financial sector – exposed in breadth if not in depth by the Banking Royal Commission hearings during 2018.
The Bill does not address the crimes perpetrated by bank lenders against borrowers, particularly highly vulnerable commercial small business and family farmers borrowers, as well as against home mortgagors.
The lacuna is perhaps not surprising. The ASIC Enforcement Review Taskforce is a product of the Murray FSI, which ignored such crimes. This absence is in turn not surprising as David Murray himself has been a key figure in vitiating any legacy of public service within the privatised CBA and installing a regime of profit at any cost.
The sections of Acts which are mooted to be amended for the imposition of harsher penalties, are not relevant to such crimes. The Acts and sections of Acts targeted by the Bill are listed under 1.17 of the document.
The Credit Act is relevant only to retail consumers (the bank lobby ensured that commercial contracts were not covered). The Act relates to home mortgages, but in the most naïve manner. The Bill does not touch on the few sections related to home loans. The Act has been ineffectual against ongoing large scale predatory lending (accompanied by manipulated documentation on the lender’s part, of which the potential customer is unaware). One needs Bill writers well informed of the fine detail of the tawdry actions surrounding predatory lending to enhance the Act’s substance. Following which, enforcement is in the first instance more important than is the penalty regime.
The sections listed from the Corporations Act indicate clearly the lack of relevance of the Bill to commercial bank victims. A pervasively corrupt sector that is the receivership industry, integral to fraudulent bank foreclosure of SME/farmer commercial borrowers, ought to be a subject for closer examination. Yet the significant Chapter 5 of the Corporations Act, addressed to this sector, esp ss400-600, is apparently not of interest in the proposed Bill.
Indeed, the gargantuan Corporations Act appears to be of little use in general in this domain. There appears to be no reference to corporate abuse of clients via the credit relationship – if it’s there it’s hiding.
The ultimate object of an effective penalty regime for the finance sector should be to send senior executives to gaol. And to work back as to how to achieve it. By contrast with potential gaol birds like insider traders, the economic and social impact of bank lender crimes is enormous.
Given that it appears impossible to offset the structural asymmetry of power between bank lender and borrower once a culture of professionalism has been dismantled post-financial deregulation, and given that monetary penalties hit the corporation (and are passed on) rather than the perpetrators, I have concluded that ‘custodial sentences’ are the only means to clear up rampant criminality in the banking sector. The Banking Royal Commission has barely scratched the surface of this criminality and its accomplices.
To this end, one faces the conundrum of how one attributes to executives an individual responsibility and accountability for crimes committed by corporations over which they preside (and are paid handsomely for this presumed responsibility).
This has been a problem since the late 19th Century, when corporations acquired limited liability status, and also the legal status of a ‘moral person’ (sic). The reform initiative should be bringing in for consultation the legal scholars in this field, and exposing their expertise publicly.
The Criminal Code is suggestive. Treasury’s Exposure Draft Explanatory Materials document mentions the Criminal Code in passing, but parts 2.5 (s12) and 2.6 (s13) are pertinent.
There one reads, rarely, of an intent to attribute corporate crimes to real individuals, and for which a corrupting culture is conducive.
For over 30 years, since near comprehensive financial deregulation, bank CEOs and associated senior executives (especially Chief Counsels, and those at the head of the ‘asset restructuring’ division) have overseen crimes with impunity.
Exhibit A is the takedown of many hundreds of Bankwest commercial property borrowers by the CBA after the latter purchased Bankwest at a knockdown price in December 2008. Even the most cursory examination of the details of a handful of this number, as noted above, would highlight persistent unsavoury practices – corrupt customer asset valuations, promises regarding loan support and turnover broken, peremptory foreclosures, laughable sale of customer assets under value, the sadistic harassment of victims and family members, etc. (Remarkably, the Royal Commission opted uncritically for the bank’s story – calling the foreclosures ‘prudent’ – while declining to investigate victim accounts.)
The key people presiding over the purchase and subsequent takedown should be in the dock – notably Ralph Norris (CEO), Ian Narev (in charge of the Bankwest purchase), David Cohen (Chief General Counsel and public spokesperson defending the takedown), and Jon Sutton (installed as head of Bankwest in the interim).
In the 2017 report of the Senate inquiry into Penalties for White Collar Crime etc., AFP spokespersons are recorded as claiming that the sections of the Criminal Code noted above remain too vague for effective action.
They need to be fixed, with input from those who have been at the coal face.
In the meantime, there needs to be a specialist unit created somewhere within the police forces structures (the AFP itself?) that has designated expertise in and responsibility for financial crime – i.e. in the criminal rather than the civil legal domain. At the moment, from feedback that I experience from victims attempting to gain redress for fraud committed against them by financial institutions, victims are compelled to go to the local cop shop, which is naturally ill-equipped but also apparently has discretion as to whether it passes the complain upstairs to the hierarchy.
There also needs to be created a federal anti-corruption body, this to catch those who act in concert (whether explicitly or by knowing inaction) with those committing financial crimes.This article was published on 19 October 2018Author : Dr Evan Jones