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Good People Doing Bad Things – How Did We End Up Here?

It is a story that has made news headlines the world over. A story about culture and greed impairing the judgement of people who should have known better. While both sides of politics have been very vocal in the wake of Hayne’s interim report, no one has touched the vexed question of how did we end up here?  

The impact on the victims has been devastating. The behaviour of the financial services community despicable and unforgivable. The viewing has been a mesmerising blend of ‘can’t watch but can’t look away’.

But to understand how we got here we need to look back nearly 30 years to the remarkable and visionary reforms of the Hawke/Keating government. That is, not at any level to lay blame at their feet but to point to a moment in time where the first piece of a complex puzzle was laid. A puzzle that through the next 25 years would gather a trifecta of seemingly unrelated circumstances to form what has become the tsunami that is now known as the Hayne Royal Commission into Misconduct in Banking and Financial Services.

 The Rise and Rise of the Big 4

Through the late 1980s and early 1990s, including the “recession we had to have” Hawke and Keating, followed later by Howard and Costello introduced reforms that led to Australian Banks becoming the most robust in the world. Reforms that would combine with the rise of China to open up the economy to what has now become 28 years of consecutive economic growth.

Throughout this period the market capitalisation of these banks has increased ten-fold which given that they occupy 4 of the top 10 holdings in almost every Australian superannuation fund has meant that every working Australian has benefited profoundly from their unmitigated success.

Forward to 2008 and the GFC. The worlds banks imploded under the weight of the subprime crisis and the freezing up of the credit markets. Bear Stearns and Lehman Bros were the high-profile casualties but there were hundreds of others. Australia was not immune. St George lurched into Westpac, Bankwest was rescued by CBA and Suncorp was saved by the timing of the government guarantee. But our big 4 banks prevailed, in-fact before long they were stronger.

We were applauded the world over for the way that our economy survived the worst economic crisis since the 1930s depression with barely a flesh wound. There are those that claim dumb luck, but the strength and management of our big banks were in no small way responsible for Australia dodging a bullet.

To this end, over 25 years Australia’s big 4 banks had developed ‘hero’ status. “Best in the world”, ”pillars of strength and resilience”. Their leaders were held on pedestals and retirees dined out on their ever-increasing flows of franked dividends.

The Mutation

Another of Keating’s great reforms was the introduction of the compulsory superannuation system to deal with Australia’s soon to retire, Baby Boomer generation. In the banks effort to broaden their revenue base and continue with the exponential expansion of their balance sheets, the lure of a multi-trillion dollar pool of retirement saving made a lot of sense. Through the early 2000s each of the major banks made acquisitions to gain a foothold in the market. CBA bought Colonial, NAB purchased MLC, ANZ purchased Mercantile Mutual in a JV with ING and Westpac purchased BT and Rothschild.

In these deals were the beginnings of the mutation that would see these banks lose their way.

The acquisitions were ostensibly, old life companies. Sales based organisations where ‘agents’ were paid a commission for selling a product to a consumer. There was often advice involved but often not. The principle approach was ‘caveat emptor’ and the assumption that if the consumer saved something rather than nothing, then some good had been done. If advice was provided it was paid for by commission from the product manufacturer and effectively the public was trained to place no value on it. Advice became something that came with the product.

But the need for considered, tailored advice was growing. The industry needed to become a profession and move to a fee based model where the public valued the advice and was prepared to pay for it. This was met with an innate resistance, ingrained over many years. The banks did not rail against this but rather acquiesced to their more learned wealth management sales executives who told them “it ain’t broke! Advice is paid for by the product manufacturer because consumers don’t value it”.

The tyranny of the vertically integrated business model prevailed.

The money flowed in. Billions of it. Further acquisitions were made to gain both product advantage and the favour of an increasingly spoilt force of advisors who had come to realise just how valuable their favour was. Consciously and in some cases subconsciously, advisors were adopting business models that made them more valuable to their product manufacturing friends by leveraging the risk of a change in loyalty in return for a large cheque ensuring tenure.

Product manufacturers referred to the advisors in their sphere of influence as ‘distributors’ and acquisitions of distribution networks were made, making many owners of these networks unimaginably wealthy.

The very word ‘distribution’ (not advice) said it all.

 The Regulators Weigh In

This then brings us to the issue of the regulators.

Let us not fool ourselves about the intent of the legislation that has been brought into play over several regimes. Quite rightly, it has been installed to change the behaviours of the industry and to ensure outcomes are focussed on ‘people before profit’. However, through a lack of understanding of the history of the business models and the products that were already in place, the impact these new laws have had is a disappointment.

As each new wave of law failed to gain traction, the complexity of the laws increased and became so prescriptive that tick a box compliance was the only way to comply. Thoughtless, tick a box compliance. This was exacerbated by the constant cries of foul play by the Industry Fund movement who refused to accept that the retail offerings may in fact have offered a reasonable alternative to the moral high ground claimed by the Union backed Industry Fund regime.

For every change the industry adapted, ‘the spirit’ of that change was compromised on both sides of the Retail/Industry fund divide. Thinking was dedicated to how to comply with the law without giving up the behaviour that the law was designed to change. As a result, consumer outcomes only ever improved marginally.

In defence of the self-licensed advice movement, there has always been a constant pressure on the product manufacturing community to improve features and reduce the price of the end superannuation products to the consumer. But this cause was lost in the politics of the broader campaign because advisors need product solutions to execute their advice and the institutions controlled the product and the margin.

War Rooms

When the major institutions were caught out they arrived with armies of lawyers from the top end of town to defend their position and ultimately negotiate on outcomes that were private, less costly and less damaging for the provider. The regulators could not afford to throw the same legal talent at the issue as they did not have the same budget or the internal talent to brief the legal team. It was a case of ‘bows and arrows against the lightening’. The regulator could not afford to lose for fear of loss of reputation or costs being awarded against them and so the ‘enforceable undertaking’ regime began.

This, in a world where the Banks were still harbouring hero status and had an air of invincibility about them. Who were the regulators to question their integrity?

Inside these institutions there was the ongoing pressure to improve dividends to the plethora of shareholders including the superannuation funds that most Australians were members of. There was a sense of untouchability that came with the fact that folklore had seen these institutions save our Nation from the full force of the GFC and that the senior management of these organisation was seen as the epitome of success in the corporate world. Geniuses who were to be revered at all costs and were never questioned or challenged.

Is it any wonder that a mutation in the moral code was let loose at some stage in this journey and went undetected and unmanaged until the blow torch of the Hayne Royal Commission? It was a culture where the unjustifiable became more justified each time the behaviours, the decisions, the mutation went unchallenged.

This Royal Commission has highlighted some heinous behaviours and the recommendations need to seek to ensure that we never find ourselves in this situation again, however it is worth reflecting on the 28 years of history that came together to all but justify the collapse in values that led to the outcomes that have been exposed.

A combination of hero status, invulnerability, shareholder pressure, cultural misalignment and in the end dumb luck led the management of our most revered organisations to turn a blind eye to the social responsibility that is at the core of their existence. Much like the leadership of Australian cricket after a similar period of invulnerability.

“Things are so bad that new laws might not help” Justice Kenneth Hayne

Let us hope that in the fall out we are not burdened with another wave of crippling regulation but laws that need to be thought about. Laws that challenge participants to ask ‘what is the spirit of this law and how do I need to interpret it?’. Tick-a-box compliance leads people to think about what they can get away with. We need new laws that acknowledge the role that these organisations can play in shaping a positive society and a positive economy and a code of conduct installed that all participants embrace as a way forward in the enhancement of a better financial community.

In the words of Commissioner Hayne:

“The law already requires entities to do all things necessary to ensure that the services they are licensed to provide be provided efficiently, honestly and fairly. Much more often than not, the conduct now condemned was contrary to law… Passing some new law to say, again, ‘do not do that’ would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

What is needed is better enforcement in order to ensure that banks and other financial institutions apply basic standards of fairness and honesty by obeying the law, not misleading or deceiving, acting fairly, providing services that are fit for purpose, delivering services with reasonable care and skill, and, when acting for another, acting in the best interests of that other?”

Tread Lightly, Collaboratively Post Banking Royal Commission

Reverberations will continue to be felt across the mahogany boardrooms and expansive top-floor executives suites of Australia’s admonished banking and financial services giants, as the royal commission claims more scalps while others jump the proverbial ship.

The revelations exposed by the royal commission have been nothing short of appalling. As members of the profession – and as people who are proud to call themselves financial advisers – We find it jarring and disappointing that these are the circumstances in which the industry finds itself.

Finding the ‘right time’ to comment has proven difficult.

A pervasive “make-money-at-all-costs’’ mentality and systemic culture of cover-up within certain institutions has cast a dark shadow over the industry – and left a nation of now-sceptical investors wondering just who they can trust.

They say sunlight is the best disinfectant.

But in our rush to clean up the industry, it’s important we don’t simply create a set of different problems. Collaboration and consultation is needed to ensure we don’t trade one conflict of interest for another.

By year’s end, with the sector purged of its sins amid the white-hot glare of political and media scrutiny, attention will soon turn to commissioner Kenneth Hayne’s recommendations and what legislation the Government will introduce in response.

The recommendations will almost certainly centre around the banning of vertical integration and the removal of grandfathering of old remuneration models. Trailing commissions are now illegal for new products but are protected in old products still held. Changes we support as long as they don’t compromise a person’s access to advice in the process.

The corporate watchdog, Australian Securities and Investment Commission (itself under scrutiny for being slow to investigate persistent concerns of misconduct in the industry), and Treasury have been highly critical of vertically integrated financial players, raising the pressure to break up Australia’s largest banks by splitting their financial advice and wealth management arms.

Both ANZ and National Australia Bank are in the process of cutting their respective financial advice businesses and have already offloaded their life insurance operations.

Commonwealth Bank is also in the process of considering offloading its Colonial funds management business and has sold its life insurance business. However, Westpac chief executive Brian Hartzer has said while stories of poor advice were “confronting’’ his bank was committed to keeping its BT Financial Group division.

It’s believed there will be recommendations centred around asset-based fees and the separation of advice into a profession in its own right, the latter we would argue is the only way forward and only achievable with the removal of vertical integration.

Take the family doctor, for example.

When we visit the doctor, we expect they’ll recommend a treatment plan that is best for our wellbeing, ensuring we make the best recovery. We don’t expect the doctor will only recommend certain manufacturers’ drugs, or medical organisations’ facilities. We expect our health won’t be compromised by doctors being driven by their own remuneration.

Financial advice as a profession should be no different. The core measure should simply be whatever improves a client’s financial welfare. Until real advice is distinguished from product-selling by legislation or self-regulation, how can anyone confidently accept undistinguished advice?

While it’s eminently clear some legislative change is necessary – for example the recent recommendations by the Productivity Commission with regard to super funds and their ‘not so’ innocuous fees – the government must tread lightly when it comes to the size and scale of new reform it imposes on an industry that is arguably heavy in this area already. The on again off again… and on again Future of Financial Advice (FOFA) of 2013/15 addressed many of the issues in question. For those in the industry who embraced the changes and adhere to the compliance rules it dictates, we have already incurred significant and ongoing operational costs as a result.

The oxymoron here is that constant and increasing industry regulation adds to the price of advice but undermines its value at the same time. In our view the real problem is business cultures blind to conflicts of interest on the basis that ‘everyone else is doing it’ – this is as much an enforcement issue as anything.

Any knee-jerk reaction without due consultation with the industry and consideration for the (often complex and significant) flow-on effects to customers will only serve to further increase the net cost of advice and, we fear, drive clients and good advisers away at a time when they are needed most.

And that would be the worst possible result.

Yes, Virginia, There is a Banking Royal Commission – Unfortunately

In a matter of days, Santa will be putting the finishing touches on his “Naughty” and “Nice” lists and it remains unclear on which side of the ledger the banks will sit.

It’s an understatement, of course, to suggest the big four (CBA, Westpac, ANZ and NAB) won’t be expecting an outpouring of festive cheer and goodwill from their 17+ million customers this year.

Despite holding around 2.5 trillion of our money, collectively – (and 80% of the nation’s loans) – it’s become almost a national sport to criticise the banks. And, it’s got to be said, with some good reason.

Concerns involving the banking sector date back at least three years, when a Senate committee recommended a royal commission into the Commonwealth Bank’s financial planning scandal. Last year, more wrongdoing was uncovered at CBA’s insurance arm (CommInsure) as well as allegations made against the other majors – ANZ, NAB and Westpac.

But – without trivialising the impact of those scandals on the industry and, more importantly, the individuals and families affected – an expensive and lengthy royal commission is NOT the answer.

The sector is already one of the most highly regulated in the world. Since the financial crisis banks have cooperated with 37 separate reviews, investigations and inquiries, leading to a raft of reforms from FoFA to Professional Standards to name a few.

The current commission – which will run for 12 months, delivering a final report in February 2019, at an estimated cost of $75 million – is unlikely to unearth anything new.

Let’s not be fooled.

This is nothing more than a quick political fix, hastily thrown together by an under-pressure Government at the eleventh hour, to appease disgruntled Nationals senator Barry O’Sullivan and other backbenchers who were prepared to cross the floor and side with Labor and the Greens to pass legislation for an inquiry.

It was inevitable. They knew it. The PM knew it.

Despite spending a year and a half categorically, unequivocally ruling out a royal commission – an inquiry former PM John Howard warned would be “rank socialism’’ – the only option left was to make the best out of a bad situation and set its terms of reference and try to control the mandate.

Malcolm Turnbull, already deeply bruised from the Dual Citizenship fiasco (at the time of writing the Opposition is now in damage control itself over the issue with several of its members potentially being referred to the High Court) appeared weak and out of touch with both his party and the electorate.

Perception is everything in politics and the Prime Minister still appears to be in the pockets of the banks, because the backflip came precisely the day after the banks themselves signed the “permission slip” gifting the PM political cover.

Politics has trumped economics yet again.

On the positive side, the commission has promised a deep dive into more than just the banks and it looks like industry funds could be subjected to some unwelcome scrutiny. In its infamously titled “Rivers of Gold” report released last month, the Institute of Public Affairs found monetary links between a number of industry super funds and the Labor movement, with more than $18 million flowing to trade union organisations over a three-year period. Needless to say it has people talking.

The problem is, there’s always a bigger picture. The risks of staging this inquiry in the full glare of the public spotlight is that you diminish the standing and strength of the banks, and undermine our economy with it.

Granted, the big four are corporate powerhouses, earning billions in profits, but let’s not forget the old State Banks of Victoria and South Australia which collapsed, robbing thousands of customers of their life savings. A strong financial and banking sector provides a significant and crucial buffer to protect us all if the economy experiences a downturn, or worse. It was one of the key reasons Australia was able to withstand the GFC crisis, which forced the closure of 465 banks in the United States alone.

Secondly, some will argue the Tall Poppy Syndrome is alive and well in Australia. We do seem to have a propensity to go after anything that is successful. Look what the mining tax did to the resources industry – our mining companies stopped investing in Australian projects and retreated overseas.  The carbon tax hamstrung the automotive industry, with utilities costs an enormous burden.

Thirdly, banks are the highest taxpayers in Australia – injecting around 14 billion into the government’s coffers each year.

Finally, we simply can’t afford for world markets to lose faith in the big four. The flow-on effects would be disastrous, fuelling potential interest rate rises, asset contraction and a slowing economy.

Even David Murray who led the last extensive review into the financial sector agrees. He has hit out at politicians and regulators fearing that “if the commission forces banks to grant widespread forgiveness of soured loans, it could undermine the entire system”. The Australian Financial Review, 6 December – Bank probe ‘threat to the system’.

It’s a sobering thought.

This may not be a royal commission we had to have, but we’ve got it. And only time will tell what lasting impact it will have, both financially and politically.

As we hang our stockings and trim the tree this time next year, Chief Commissioner Kenneth Hayne will be close to wrapping up the inquiry, putting the finishing touches on the final report for public consumption.

The proof, as always, will be in the pudding.


Little known charity is changing the lives of children with Autism.
FinSec boys rally awareness through their ‘Wear Your Care’ initiative.

Advisers at Adelaide’s top financial services firm FinSec Partners, Dane Avery and Nathan Pech are going the distance (quite literally – 12km to be exact) to raise much needed awareness for Rocket, a charity close to both their hearts. Brain child of Dane Avery (partner Abbey is a Rocket therapist), Team Rocket will be out in force for this year’s city-bay fun run. “We don’t mind if you run, walk or dance your way to the finish line, Team Rocket is all about getting out there, having fun and showing that you care” Dane says. Passionate advocate Nathan Pech, father to Rocket success story Jack, aged 5 explains; “Rocket is the only organisation of it’s kind in SA. They provide ‘evidence based’ therapy to children with Autism Spectrum Disorder (ASD) and other developmental delays – Ensuring the Rocket kids get the best chance they have of living a normal life and their track-record speaks for itself”.

An idea forged from experience and passion, Rocket founders had a son diagnosed with autism at 2 years of age. At the time they were living in the UK and Applied Behavioural Analysis and Verbal Behaviour (ABA/VB) therapy was not only readily available it was the norm, however returning to Adelaide in 2011 it was clear that the same quality and type of service was unavailable. The children of South Australia deserved more and Rocket was born!

A huge inspiration to the Rocket family, Jack Pech a founding client and testament to the great and very real work Rocket do, began his therapy at age 2. Within only a few months he had already developed language skills and today is now considered age appropriate in many areas.
“Rocket has given Jack the gift of opportunity, he attends kindy, plays soccer on a Saturday and next year we celebrate his greatest milestone, mainstream school” says Nathan.

It is every family’s desire for their children to fit in and live happy, healthy lives and with the support of Rocket, SA’s ASD kids now have that opportunity too.Therapy is intense, up to 40 hours a week in most cases and so funding is imperative. “People can help by purchasing a ‘Wear Your Care’ T-shirt all proceeds + an additional FinSec donation will go directly to Rocket. You can also show your support by joining Team Rocket on September 21st for this years City-bay-Fun Run”. Explains Dane.
For more details follow the links at

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