Co-Written by Reza Monem and Shireenjit Johl
Unbridled desire to make a sale or profit at any cost and the bank executives’ remuneration schemes linked to profit were at the centre of the much-publicised malpractices of the banking industry.
“Greed” is the word used by the Royal Commission in describing the conduct of the banking, superannuation and financial services industry. Otherwise, how can one explain charging fees for services not provided? How can one explain fees charged to dead people?
The Australian banking industry has been politically very successful in recent decades. During the GFC, the government of the day provided financial guarantee to deposit holders for preserving public trust in the banking system. It was long thought that the Australian financial regulatory system is one of the best in the world. There was also a tacit acceptance in the Australian community that a strong economy needs a strong banking industry. So when the cost of funds kept rising in the international markets in the post-GFC years, banks found a solid excuse for raising their lending interest rates asynchronous to the RBA’s interest rate decisions. Consequently, when the average home-loan borrower felt the pressure from rising bank interest rates, they were told by the government of the day to “switch banks”. Meanwhile, Australian banks learned their ways of making money through service charges and fees. For example, starting with $A27.06 billion in FY 2013, the four major banks’ aggregate after-tax cash profit reached at a record high of $A31.5 billion in FY 2017. The average net interest margin on a cash basis for these banks were 200 basis points or more over the FY 2013-2018 period. Ironically, nobody raised their eyebrows when major four banks reported record profits despite crying poor about rising costs of funds in the international markets.
The desire to survive and excel under tough global conditions perhaps resulted into a culture of performance in the banking industry. Profit and revenue became the gold standard of performance in banks. Moreover, in the pursuit of delivering performance and creating shareholder wealth, executive remuneration schemes were linked to performance. The desire to perform better and aim for excellence sounds ideal in theory, but this can also lead to the pursuit of profit at any cost which in turn informs employees what the firm values. This is central to the misconduct in the banking industry.
In markets for tangible goods and everyday services (like cutting hair in a barber shop), the customer is relatively well-informed. The customer can readily verify whether she has been conned or not. But with complex products like banking and financial services, the average customer is far less informed. It is virtually a David and Goliath battle: the naïve bank customer against the sophisticated bank with all of its superior information set, advanced analytical tools, and sharp legal minds. There is no way the naïve customer can get a “fair” deal unless the customer is protected by the law. The only other hope for the bank customer is whether the bank believes in a “fair go”, whether the bank employees behave ethically, and in the best interest of the customer. This will require a cultural change, a moral shift – an attitude to be fair. As the Commissioner Hayne pointed out, such a change is going to be a very long, slow process.
Reza Monem and Shireenjit Johl are from Griffith University, Australia