Bank Inquiry Special: The scandals we never knew

The Financial Services Royal Commission takes centre stage in this week’s Money Café. Ben Butler, Business Reporter for The Australian joins James Kirby, Wealth Editor at The Australian to discuss what the big four banks have been up to. James also goes through a number of listener questions regarding ETFs.


Hi, I’m James Kirby, Wealth Editor at The Australian.

And I’m Ben Butler, business reporter at The Australian.

And we are The Money Café.

The Money Café.

This week’s Money Café is coming to you live from the federal court in Melbourne.  We are just behind the federal court in Melbourne, and beautiful day in a beautiful garden in a café in what’s called the Hellenic Museum.  Now, the reason we’re at the federal court of course is because of the Royal Banking Commission.   Alan Kohler isn’t with us this week but we had actually discussed that we should really feature this sooner or later because it’s been now running for two weeks.  So, literally from the court bench I have Ben Butler here who is with The Australian and he is tasked with reporting on the inquiry and he’s in there every day.  He has come out, it’s lunch time and he has just dashed out across the street safely, and we’re here and he’s going to tell us what’s actually been going on.  Welcome to the show, Ben.

Thank you.

Well, what happened this morning?

Well, this morning we heard the latest in a sort of cavalcade of bankers who were sort of dragged into the witness stand.

Are they humble, these bankers, do they come across as trained or how do they play it?

Well, sadly, many of them including today’s example seem to think that they can continue talking ‘bankerese’ in front of the Commission and it’s not something that impresses council assisting or the Commissioner, Kenneth Hayne, very much.

When you’re inside is it really just the two of them, the Commissioner Hayne and his Assistant Council, Rowena Orr.  Is that it, is that the Commission as such?

Well, no, there’s a lot more going on behind the scenes and there is in fact a rotating sort of bench of council.  So, Rowena Orr handled most of last week, the opening week’s hearings, and for the last few days we have had Albert Dinelli doing the questioning.

Yes, and they are QCs are they?

Rowena Orr is a QC, Albert Dinelli is what they call a senior junior which is a piece of legal jargon…

A senior junior?

It means that he’s been around a while but they haven’t given him the initials yet.

I see, okay.  Now, tell me this – I have a couple of questions for you because you’ve been there from the start and of course you’re filing all the time through the day on it which is very interesting, and fascinating how we can do that these days, that we can file through the day.  So, what’s surprised you?  Because you’ve covered the scandals, you’ve actually dug up some scandals yourself, so when you’re sitting there and you see it all formalised as such and you see these people subpoenaed in front of a judge what surprised you?

Yeah, so this is really interesting because when the first round of hearings was announced we had this sort of idea that well we know about these cases already and it’s like we’re not going to learn anything new.

Yeah, that we knew all the scandals. 

But, we didn’t.  Even about things where it had been through ASIC, the Australian Securities Investments Commission had prosecuted people or reached some kind of regulatory deal with them and there have been people paid money we had really no idea about the depth of dysfunction that there is within a lot of systems in the banking world.

And they don’t necessarily do the right thing by ASIC either.  Am I jumping to conclusions?

You are not.  There have been some very good examples produced during the Commission of banks really dragging their heals on either admitting that anything had gone wrong let alone that they had done something wrong and dragging their heals on compensating customers for the things that had been done wrong to them sometimes over years and years.

Yeah, and they’ve brought in witnesses, how are they selected, I wonder, these witnesses, who picks them.

Yes, so there is two sort of basic types of witnesses.  There’s ones from the banks and the banks have been asked to put those people up as people who can give evidence on a particular area of the Commission.

Managers from certain pockets.

That’s right, and so they’re relatively senior, they’re general managers or executive general managers and they’re the sort of people who sit just below the executive committee of the bank, so just below the people that really would pop up in the media normally.

Yes, right, so they’re just below the people who actually get paid an awful lot for running these departments, is that…

Yes, although I don’t think they’re necessarily starving in terms of how they’re getting paid themselves.

Okay, yeah.  So, when the buck goes all the way up to the CEOs and the very top deck of the banks why aren’t they in the Commission?

I think we will see them in the Commission eventually, or at least some of them, when we get closer to the end wherever that is.

Yeah, because it’s going to run for…?

Well, it’s going to run until February next year.

With gaps?

Yeah.  So, the way it works is they do a two week burst of public hearings and then there is basically a month off while they do some work preparing for the next public hearing and that’s going to continue, I think, pretty much until at least September when there has to be an interim report.

I see, so we’re going to get an interim bulletin in September?

Yes.  I’m sure that that will be produced, that always does happen with Royal Commissions.

And have they the power to change anything, do they make recommendations or…?

Well, yes so this is interesting.  So, they can make recommendations about what should be done but just the existence of the Royal Commission has already prompted the banks to do certain things like close parts of the business that are full of problems.

Yeah, they actually closed some things in advance of the Commission, didn’t they?

Yes, that’s right.

Like what?

Well, for example today we have heard about what’s called the asset finance division of ANZ and it’s basically the bit that does car loans, that’s one of its main businesses.  The announcement that it was closing was made on the Friday before the start of the Royal Commission.

So, then they could tell the Commission well actually we don’t do that anymore, is that right?

Correct, yes that’s right.  Now, in fact the decision to close it appears to have been made in February.  According to some board minutes we saw today – so, it’s also a very fascinating insight into the actual operations right at the top of the banks that we’re getting because they’ve got all the documents.  But, we didn’t learn about it until the Friday before the start of the Commission and when they made that decision in February they knew that the Royal Commission was coming, it was announced in November and you can see through patterns of behaviour across all the banks that there has been this from late last year or even the middle of last year getting it ready.

The other issue, is there incidents of law breaking?  That’s the other thing, I mean for all the bad behaviour and some of it is spectacular, and clearly breaches all sorts of standards, community standards, investor standards, but how often so far have they come across law breaking?

Quite a bit.  So, we kicked off last week with a bit of a burst on the NAB and what’s called the introducer program where people get paid money.

Yeah, these were the gym instructors that are getting money for passing people over, yeah.

Correct, passing people over for a home loan.  What we learned about that was that there was a ring of bank managers and bank staff in Western Sydney primarily that later spread to other parts of New South Wales and Victoria.

Now, that’s not illegal in itself.

No, that was not illegal but it was against the bank’s guidelines for them to be gym instructors, they’re supposed to be ‘reputable’ kind of professional people like financial planners – another topic for another day perhaps.

Okay, but what was illegal?

Bank managers were taking bribes to approve home loans for people who should not have gotten a home loan.

What bank was this?

This was the NAB, and they have said that that’s what happened.

Right, yeah.  It’d be isolated to NAB and isolated to Western Sydney in the court?

Well, we don’t know whether it’s isolated or not because the Commission is proceeding through case study methodology where you take a detailed look at one area and then that’s used to draw conclusions about problems that exist more broadly.  So, it’s not perhaps super scientific but given the tight timeframe that the Commission has been given there’s not really any other way that it can be done and it is the way all Royal Commissions operate these days as well, the institutional child abuse one did the same thing.

Yes, it’s been quite a while since there has been a financial, lots of Royal Commissions of course, controversial ones, on Labor etcetera but some time since we’ve seen a financial one.  Now, here’s a hard question, Ben.  Which bank so far looks the worst?  I know it’s only week two, I know it’s only consumer finance but all four have been in, right?

Yes, that’s right.

And is it restricted to the big four?

No, it’s not.

But it’s going to be dominated by them?

It will be, we will get some other institutions and we will get super funds, for example, at some point and that’ll bring in a whole bunch of…

Wealth advisors and…

Yes, the next round will be financial planners and wealth advisors, and that’s next month.

Next month, there’s a gap.  So, who looks worse?  I know this is purely subjective but…?

Yes, so far it’s probably the CBA because we’ve spent a lot of time talking about in the Commission hearing about their mortgage broker business, Aussie, and the fact is that the portrayal of it in the Commission has been as an organisation that basically has no controls.  We have learnt that CBA’s internal risk audit team gave it a red report just in December which means it failed risk…

Yes, and of course Aussie Home Loans people would now realise is 100% owned subsidiary of Commbank.

That’s right, so John Symons who used to own it got out late or middle of last year I think.

But he was half out, wasn’t he, for years?

He had been progressively selling down his stake and you might say that his timing was pretty much perfect.

Yeah, to that extent it’s not his company it’s the CommBank’s company.  That’s interesting and actually I think we do every week, Ben, a Mega Trend.  What we call the Mega Trend is sponsored by BT and I think we have to be realistic and say the Mega Trend certainly in Australia and Australian financial services is the dramatically deteriorated standards of banking.  It seems like at the worst cases it’s sort of sunk into little better than a sales culture.  Tell me on the other end in relative terms which bank looks the least worst if I could put it that way?

Well, it’s a bit of a tie for the rest, really.

That’s a very diplomatic answer.

They’ve all had their fair share out of the big four.

Okay, this is obviously only consumer finance and it’s entirely subjective.

That’s right.  So, I think you’re doing well so far if you haven’t appeared.

Alright, the regionals then.

Well, the regional banks, Macquarie and AMP who we will expect to see something from them eventually.

Yeah, and there’s really only two independent regionals anymore, Bendigo and Adelaide, and neither of them have appeared just yet.

No.  That’s right.

Yeah, Bendigo and Adelaide, sorry, is the one bank and who is the second independent regional out there?  It’ll come to me soon.  Okay, now looking at it then there’s two waves to this, isn’t there.  Just wrapping up on it, Ben, there’s the consumer and how they deal with the bank and then there’s the shareholder and their response to what’s going on, if anything.  So, what do you think will happen next?  You were saying at the start that you thought you knew all the scandals and in a way the consumer probably thought that too.  Do you think consumers will respond by moving away from banks if they can?

Well, I don’t think it’s possible to.  This is what we’ve also learned, is the way that banks are – they’re completely intertwined with pretty much every aspect of our daily lives.  To pay for a coffee at this café you’ll probably use…

You interact with the banking system, yeah.

You interact with the banking system, you know.  Lots of people just don’t use cash as much as they used to.

It comes across that Rowena Orr and the Commissioner are surprised, they seem to be surprised.  So, do you think their recommendations will be severe?

I think what we will see – I think we’ll see some fairly substantial recommendations.  This is just based on the musings of the Commissioner from time to time during the hearing.  But, he is very concerned about the Commissions paid to third parties, so the introducers, mortgage brokers, car dealers, these kinds of people to get business for the banks.

Yes, who were never traditionally allowed bank as such, bankers banked and they’ve to some extent outsourced it, haven’t they, to others?

They have.  So, for example in mortgage brokers I think you can expect to see the end of Commissions based on the size of the loan and the end of trailing Commissions.  I think that that’s gone, which would just be a repeat of what happened with financial planners a few years ago.

But they somehow dodged that, didn’t they?  They somehow got an exemption on that whole FOFA reform.

They did, and in retrospect that’s kind of weird and it’s an obvious gaping loophole.  The other thing about that is that the Commission will be pushing against an open door with the banks on that one because the mortgage brokers have now grown to be half of the mortgage market and it’s costing the banks a fortune to pay these people so they would quite like to get rid of them.

They’ve actually said that, right, I mean was it Ian Narev of Commbank that said I wouldn’t mind bringing it back in?

He did, he was, but this is typical of the banks and we’ve seen this also with the car dealer issue with Westpac.  None of them are willing to do it themselves first.  So, that’s a big lesson here, is that competition between the banks has failed to produce good things for consumers.  This still resulted in consumers getting ripped off because of this agency problem with these intermediaries who actually the bank needs to cater to rather than the end customer who’s actually borrowing the money and actually has to pay it back at the end of the day.

So, in terms of trying to guess what’s going to happen here after the first two weeks in terms of consumer finance hearings perhaps the whole intermediary system may be reviewed.

Yes.

Okay, very good.  Ben, thank you very much for coming over from the court.  I know you have to literally dash back across the delightful gardens of the Hellenic Museum and into the federal court where the Commissioner and co will be resuming soon so thank you very much, Ben Butler from The Australian, for joining us today.

Thank you.

Thanks, Ben.  I know that before we go we had a couple of questions from our readers over the week and I know that they do tend to build up so I am going to just quickly go through them and answer them to the best of my sole ability without Alan here.  I’ll just run through them.  First of all we have one from Fraser, he says at auctions demand is now high with one to two bidders and rents are now climbing.  Given the lacklustre demand are our immigration figures true?  Thanks for the podcast.  Well, Fraser, we have to take the immigration figures for what they are from the ABS but I think the point perhaps worth bringing in here is that China based buyers – whatever about the migration figures it’s clear from the reports with the softening of the Sydney and Melbourne markets in particular that one of the things, and there are many factors, but one of the factors is the withdrawal to some degree of China based buyers from the market.  So, yes to that extent migration issues are relevant but that is as far as it goes I would think.

Andrew.  Thanks for the podcast, I listen every week.  Why don’t any tax policies ever use your gross income as a qualifier?  If gross income was used then you couldn’t be accused of hitting low income earners, e.g. you get your imputation credits if your gross income is below a certain point every year.  I see where you’re coming from, yes, but I suppose the entire architecture of the tax system, Andrew, is designed now around the base of gross income and it does, for its failings, have some great uses in that it encourages investment in the community and there are rebates around that, some of them obviously in the news at the moment with the imputation credits.  But, I think on balance I see why gross income is what’s used in the tax system and it probably will take a considerable re-architecture of the whole thing to change it.  I think that’s unfortunately well beyond the scope or wherewithal of either the regime we have or the regime coming down the track, I might be wrong.

Okay, Travis says I always like the sparring on ETFs.  Yes, Alan has mentioned robotics ETFs a couple of times, I can’t find it though, Travis, we’ll have to get Alan to find it when he comes back.  Travis also asks he mentioned Beta Shares are looking at their ETFs, they have a cyber security ETF but that wouldn’t be it, no it wouldn’t be it but Beta Shares do some very interesting ETFs.  They’re very much the original and the only independent major player in the Australian market run by a man called Alex Vynkur and they are doing some very interesting work at the moment.

Tom.  I love the podcast and I am contacting regarding the ETFs BEAR and BBOZ.  I am considering purchasing these as protection.  I have noticed they have low liquidity and wondering if there’s any other way to possibly purchase short exposure on the ASX.  Yeah, that’s a great question.  Tom, the short answer to that is there’s lots of ways to get short exposure but they’re mostly through funds and mostly through long/short funds where an element of the fund, perhaps 30% of the money, is used for shorting, that’s the main way.  These particular ETFs, BEAR and funds that are designed for protection you must remember that they’re good when the market is going down but if the market is going up they’re going to go down, that’s the whole thing.  They go the opposite way, they’re non-correlated as such.  So, you might find if we had a very good year in the market you’d be very disappointed with the performance of those funds, that’s the risk you take and I hope that fund marketers and promoters make that very clear.

Martin has a question.  Some ideas we might address about Shorten’s tax.  Yes, indeed.  Martin suggests you convert your share holdings in super to unit trusts which do not pay tax, yes, you invest in overseas shares, yes well that’s of course a good idea because people are clearly not diversified enough.  There’s a lot of evidence that SMSF funds in Australia aren’t diversified sufficiently so to that extent you kill two birds with one stone, if you buy overseas shares you start to diversify and you also as such hedge against the looming, and almost certain now, change to franking credits which the ALP will bring in.  When I say certain I mean certain that they will do it because they are, of course, emboldened I think to some degree by the fact that the by-election in the constituency of Batman last weekend in Melbourne was a swing to the ALP which would suggest that that electorate at least didn’t actually penalise the ALP for the plan on dividends but rather rewarded them.  So, I think you have to be on standby now to know that that’s going to be for sure a part of ALP policy should they win in the forthcoming federal election.

Joey says I’m not sure if you remember my question regarding ETFs but there appears to be some confusion about what I was looking for.  Yes, okay Joey.  Let’s see what the question actually is.  He says my question was similar to the question on Reddit, when investing in ETFs, especially international ETFs, what’s the easiest way to work out how much of my portfolio is taken up in a particular country or sector, or both?  Okay, there’s a pretty easy answer to this one, Joey.  The way you do it is you just look at the top ten holdings of the ETF.  Now, if you look at a big ETF like Vanguard, which featured funnily enough in The Australian just last weekend and had the top ten holdings in a table.  Those ETFs will show you their top ten share holdings, right, so that would mean that you could see fairly clearly what they’re buying at least in their top ten holdings.  Then, you can from that deduce, if you like, what they actually do.  The question really that would be helpful is the company and the ETF might be domiciled in one country but their revenue might be led to another country.  Yeah, well look again this is all about how closely you study these things.  For instance you could buy an ETF on the American stock market which just captures the whole thing. 

There’s something like DJ Global Titans Fund actually tries to capture the fact that it’s American companies that are multinational so there are actually gradations inside the ETFs.  I think the more you study them, both the tables as to what’s being offered and insight into the ETFs themselves you get a much better grasp of just what they invest in and what the companies are.  I think one last thing on that, Joey, is that the issue of technology is fairly broadly defined so it can be kind of hard to sometimes nail that one but you could certainly go a long way by looking at the tables of ETFs and then looking at the ETFs and their top 10 holdings.

Okay, I think that might be just about it for this week.  I might leave it there for today.  Don’t forget you can subscribe to The Money Café on Apple Podcasts or an app of your choice and while you’re there it’s very helpful if you could leave a review or rating, it helps listeners find the show.  Also send in a question and we’ll answer it on next week’s episode.  E-mail us at hello@theconstantinvestor.com.  Until next week I am James Kirby, Wealth Editor at The Australian and we should be back, Alan and I, very soon.  Thank you.