Chickens coming home to roost for Australian Treasurer and former banker Josh Frydenberg

When a Liberal Treasurer and former banker meets with a royal commissioner whose banking and finance inquiry he (along with the rest of the Turnbull-Morrison Government) tried to nobble.................

The Sydney Morning, 1 February 2019:

It’s known, in the game, as a picture opportunity.

Politician on the make meets constituent/kiddie/moviestar/public figure, hands are grasped, big smiles, cameras whir, flashes pop and the happy little circus moves on.

Sometimes, it doesn’t work so well. The kiddie bursts into tears. Sometimes, it’s a bust. The movie star’s smile is so radiant the politician may as well have stayed in bed.

And then there’s the day the Treasurer, Josh Frydenberg, met the royal commissioner, Kenneth Hayne.

The very air took on a chill so deep it might have blown in from the Arctic vortex currently turning the northern hemisphere to ice.

"A handshake or something...?" implored a photographer, vainly hoping to open a crack in the glacial atmosphere.

Ever had an awkward Friday afternoon meeting?

Josh Frydenberg and Kenneth Hayne sure have. pic.twitter.com/EpQEgYCmRV

— ABC Politics (@politicsabc) February 1, 2019

Commissioner Hayne, fresh from months assailed by evidence of the wicked doings of gangsters in suits and giving more than a few of them a doing-over from the bench, wasn’t in a handshaking sort of mood. Or any sort of ice-breaking mood at all.

As Frydenberg, the Treasurer of Australia, sought desperately to maintain a smile that gradually devolved into a hideous rictus, Justice Hayne studied a spot in the air that might have been in a universe far, far away, where he appeared to wish he might be transported.

His hands remained determinedly resting, jiggling slightly, on the Treasurer’s desk. Not a word passed his lips, nor the hint of a smile.

The occasion was the official hand-over of Justice Hayne’s voluminous findings on the behaviour of Australia’s financial sector.

Frydenberg had needed the photo opportunity to go well.

Why, the government he serves had twisted itself in knots trying to avoid calling a royal commission into the banks before being dragged screaming to it. Here was the moment to put that all behind him.

Justice Hayne wasn’t cooperating.

The awkward moment stretched. And stretched. The volumes of the final Hayne report sat as untouched. They might have been hand grenades…..

What the Royal Commissioner found.......

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report, 1 February 2019, excerpts:

This Final Report seeks to take what has been learned in respect of each part of the financial services industry that has been examined and identify:

• issues;

• causes; and

• responses and recommendations.

1.1 Four observations

Those analyses, taken together, will reveal the importance of four observations about what has been shown by the Commission’s work: the connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account.

Each of those observations should be explained.

First, in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers.

The conduct identified and condemned in this Final Report and in the Interim Report can and should be examined by reference to how the person doing the relevant acts, or failing to do what should have been done, was rewarded for the conduct…..

Second, entities and individuals acted in the ways they did because they could. Entities set the terms on which they would deal, consumers often had little detailed knowledge or understanding of the transaction and consumers had next to no power to negotiate the terms. At most, a consumer could choose from an array of products offered by an entity, or by that entity and others, and the consumer was often not able to make a well-informed choice between them. There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.

Third, consumers often dealt with a financial services entity through an intermediary. The client might assume that the person standing between the client and the entity that would provide a financial service or product acted for the client and in the client’s interests. But, in many cases, the intermediary is paid by, and may act in the interests of, the provider of the service or product. Or, if the intermediary does not act for the provider, the intermediary may act only in the interests of the intermediary…..

Fourth, too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished. Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation. And wrongdoing is not denounced by issuing a media release.

The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account. The community recognises, and the community expects its regulators to recognise, that these are two different steps: having a wrongdoer compensate those harmed is one thing; holding wrongdoers to account is another…..

1.2 Primary responsibility

There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management. Nothing that is said in this Report should be understood as diminishing that responsibility. Everything that is said in this Report is to be understood in the light of that one undeniable fact: it is those who engaged in misconduct who are responsible for what they did and for the consequences that followed. Because it is the entities, their boards and senior executives who bear primary responsibility for what has happened, close attention must be given to their culture, their governance and their remuneration practices.

The Final Report contains 76 recommendations and the Morrison Government states that it will “take action” them all. However the number of parliamentay sitting days Prime Minister Morrison has scheduled for 2019, commencing on 12 February 2019 and thereafter for thirteen days until 30 May, rather rules out the Parliament addressing the issue for much of this year.

Volume 2 of the Final Report holds findings on the Case Studies. These studies involve the National Australia Bank (NAB) and its affiliates, the CBA Group, the AMP Group, IOOF, a subsidiary & associated entities, ANZ Bank, Suncorp, Q Super and Hostplus Superannuation Fund.

The Royal Commissioner made 24 referrals to the regulators ASIC and APRA to take action over misconduct and all but one of the major banks were named in referrals.

On 4 February 2019 when Frydenberg asked by mainstream media why the Coalition Government had not addressed some of these issues sooner he tried to defect blame to Labor not once but twice for not acting when it was last in office.

Unfortunately for the Treasurer this opinion had already appeared in The Sydney Morning Herald on 28 April 2018 reminding voters of the truth:

The Coalition wasn't merely asleep at the wheel when it came to the practices being exposed at the banking royal commission: it pulled out all stops to allow some of them to continue, including attempting to circumvent the will of parliament, in an extraordinary 12-month burst of activity that began within weeks of its election.

It had inherited Labor’s Future of Financial Advice Act, legislated in 2012 but not due to take full effect until mid 2014, 10 months after the election that swept it to power.

The result of a parliamentary inquiry and years of agonising about how to protect consumers in the wake of the collapse of investment schemes including those run by Storm Financial, Timbercorp, Opes Prime, Bridgecorp, Westpoint, Trio and Commonwealth Financial Planning Limited, the law banned secret commissions and, from that point on, required financial advisers to put the interests of their clients ahead of their own.

Actually, it came into effect on July 1, 2013 during the life of the Gillard Labor government, but the Securities and Investments Commission decided to take “a facilitative compliance approach”, meaning it wouldn’t enforce it until July 1, 2014, which turned out to be after the Coalition took office.

The law banned kickbacks and commissions paid to advisers by the makers of the products they were selling, which for the dangerous products had been extraordinarily large. Advisers putting retirees into Storm Financial had been paid 6 to 7 per cent of the amount invested. Advisers putting clients into Timbercorp had been paid 10 per cent plus an ongoing fee for as long as the funds stayed there.

Labor’s law wound back, but did not completely eliminate, the ability of banks to reward their staff for recommending the banks’ own products, and it only applied prospectively. Existing kickbacks could remain but clients would have to be told how much money was being taken out of their investments each year and would have to approve.

Once every year they would be given a statement explicitly telling them how much of their funds was being siphoned off to pay their adviser. Once every two years they would be asked if they wanted it to continue. If they said "no" or said nothing (which would be the case if they were dead, or the adviser had lost contact with them) the outflow would stop.

Clients who felt they were continuing to get good service from their adviser could allow the withdrawals to continue, which might be why it so terrified the (largely bank-owned) advice industry.

Days before Christmas 2013 the Coalition outlined amendments it hoped to get through parliament. Fee disclosure statements were only to be provided to new clients. Old ones could remain in the dark. And there would be no need for clients to opt in to having money removed from their accounts, ever. And there would no longer be an overarching requirement for advisers to act in the best interests of their clients, merely steps they would have to follow, “so that advisers can be certain they have satisfied their obligations”.

As July 1 2014 approached and it looked as if the amendments wouldn’t get through parliament, Finance Minister Mathias Cormann gazetted regulations that purported to have the same effect. Parliament would have been able to disallow them when it next met, but he delayed tabling them until the last possible moment, lengthening the period of time they were in force without being tested. Then Labor trumped him by reading them out aloud in the Senate, which effectively tabled them and forced a vote. Cormann managed to get the Palmer United Party on side and keep the regulations at first, until Jackie Lambie split with Clive Palmer over the issue and left his party and voted them down.

Then, when all had been lost, the banks and financial advisers begged for more time. They have been "thrown into disarray" and wouldn’t have their systems ready. ASIC said it wouldn’t enforce the law until July 1, 2015, two years after it had been due to begin.

ASIC and Cormann had given the financial advice industry an extra two years in which to charge commissions and escape an overarching requirement to put the clients first.

Even now, all this time later, I can’t work out why Cormann tried so hard.