Banking Bad Read online

  Dedication

  To those who choose not to stay silent

  Contents

  Dedication

  Prologue

  Part 1: What goes on in the shadows

  Four decades of misconduct, malpractice and misinformation

  1.Caught in a trap The foreign currency loans scandal

  2.Diversify or perish The shift to financial services

  3.A soft touch Resisting the regulators

  4.Bigger is better? Incentives, targets – and deception

  5.Giving with one hand . . . Misleading advice and margin calls

  6.Profit before people Unmasking CBA’s rogue planners

  7.‘Banking Bad’ Out of the newspapers and onto TV

  8.Reluctant concessions CBA in damage control

  9.Flawed schemes Timbercorp, ANZ and the future of financial services

  10.Trouble on the Death Star NAB’s dirty secrets

  11.Shooting the messenger IOOF’s smear campaign

  12.Claims denied CommInsure’s unscrupulous tactics

  13.Battle lines Labor gets onboard

  14.Banksters Money laundering with CBA

  15.About-turn The reluctant royal commission

  Part 2: A blast of sunlight

  The royal commission names and shames

  16.Round 1: Consumer lending The mortgage-broking rort

  17.Round 2: Financial advice Theft, lies and fees for no service

  18.Round 3: Small-business loans The banks dodge a bullet

  19.Round 4: Services in regional and remote communities Preying on rural battlers

  20.Round 5: Superannuation Kept in the dark

  21.Round 6: Insurance Bleeding them dry

  22.The interim report A taste of things to come?

  23.Round 7: CBA ‘Temper your sense of justice’

  24.Round 7: Westpac Agreeing to disagree

  25.Round 7: ASIC and APRA Regulatory twin peaks

  26.Round 7: NAB ‘Hubris wrapped in arrogance’

  27.Round 7: ANZ Slow to respond, loath to change

  28.Too close for comfort Banks and their auditors

  29.A waiting game Sweating on the verdict

  30.The final report Day of reckoning

  Epilogue

  Photo section

  Acknowledgements

  Glossary of terms

  Endnotes

  About the author

  Copyright

  Prologue

  ‘CAN YOU PLEASE GIVE me a call when you’ve got a minute, Adele? It’s about the Commonwealth Bank. It’s big. I have a whistleblower who wants to speak to you.’

  It was 4 April 2013 when I received this phone message from Nationals Senator John ‘Wacka’ Williams. I’d come to know and trust Wacka after I’d written a series of stories that exposed some seriously dodgy behaviour in the insolvency industry, including fraud, standover tactics and links to the criminal underworld. An affable but hard-nosed politician, Wacka had received death threats and been the victim of smear campaigns after those investigations and had never flinched. This had cemented my deep respect for him. I hadn’t thought anything could get much grubbier or more corrupt than liquidators and the insolvency industry, but Williams’ phone message would blow this assumption out of the water.

  The call came as I was getting ready to head to China on a work trip to cover the annual Boao Forum for Asia, a conference that brings together business people, politicians and academics to discuss policy and economic issues of the day. Prime Minister Julia Gillard was attending, along with the recently appointed Chinese president, Xi Jinping. I called Wacka back and he gave me the phone number of the whistleblower, Jeff Morris.

  In between packing and finalising a late visa application for China, I rang and spoke to Morris, who’d worked for the Commonwealth Bank (CBA) until March 2013. He wanted to blow the whistle on CBA’s malpractice; he also wanted to alert the public to the slowness of the country’s corporate regulator, the Australian Securities and Investments Commission (ASIC), to investigate allegations he had already made.

  After our call Morris emailed me over one thousand pages of documents, which I printed out before racing to the airport, hoping I wouldn’t be late for my flight. What he had told me during that phone call and the material he had sent would lead me to uncover and expose misconduct in one of the country’s most trusted and venerable institutions.

  As I sat on the plane and went through the documents, I became increasingly shocked. They included internal bank emails, whistleblower correspondence with ASIC, and a series of customer files, which showed CBA had wilfully engaged in forgery, fraud and a management cover-up. The bank had put profit before people – a theme I would become all too familiar with over the next five years as I investigated other well-regarded financial institutions.

  CBA wasn’t some shonky fly-by-night company no one had heard of; it was the so-called ‘people’s bank’. Established by the Commonwealth Government in 1911, it had been allowed into our children’s schools to sign up kids to savings accounts. It was an iconic institution that most Australians knew and trusted.

  The most confronting document I read on that flight to China was a fax Jeff Morris had sent to ASIC warning it that CBA was engaged in a ‘high-level conspiracy’ to ‘conceal repeated material breaches, corruption and gross incompetence of the bank’s star financial planner, Don Nguyen, resulting in losses to clients of tens of millions of dollars’. Those ‘material breaches’ included forging clients’ signatures, failing to provide essential documents such as statements of advice, and giving inappropriate recommendations. The most telling detail was that ASIC had ignored Morris’s tip-off and done nothing for sixteen months.

  Here was a scandal that involved the most profitable company in the country, its number-one financial adviser, a management cover-up and a regulator that had failed to act. It had the makings of a crackerjack story.

  *

  As soon as I arrived back in Australia, I rang Wacka and organised a meeting in Sydney with Jeff Morris and some other people Jeff knew who had battled CBA.

  Weeks later, on 1 June 2013, the first day of winter, the story I wrote sent a hurricane through the financial services sector when it appeared on the front page of the Sydney Morning Herald and The Age. The public response to the article was phenomenal. It was the leading news item of the day, the next day and the next. Australians were appalled that CBA had shafted some of its most vulnerable customers and engaged in practices that were deceiving and illegal.

  The initial articles focussed on CBA and one dodgy financial planner, but as the weeks went by the story got bigger. CBA’s malpractice became a symbol of a toxic banking culture built on greed, targets and bonuses, where profits were put before people, and corporate regulators sat silent. Previous banking scandals had come and gone, but this one resonated with the public, and CBA couldn’t fob it off as it had done in the past.

  The banks’ power rested not just in the profound wealth they were producing but also in the deep connection between the banks and the political establishment. Former heads of treasury, premiers, Reserve Bank governors, ASIC commissioners and ministerial advisers had all joined their ranks, taking up seats on boards and other key positions of influence. The widespread, aggressive and successful lobbying by the banks over many years was not unrelated to these appointments. The extent of the interlinkages dwarfs any other sector. The meshing of the political class into the finance sector both reflects the power of the banks, and in turn contributes to the power of the banks.

  But the Commonwealth Bank financial planning scandal pierced that veil.

  Soon the story had multiple villains, hundreds of thousands of victims, and many superheroes. Jeff Morris’s courage in blowing the whistle on wha
t was going on at CBA made him one of those superheroes. He helped break the culture of silence and spurred other bank insiders to speak out. Many came to me.

  A whistleblower from Macquarie Group contacted me with information about financial advisers cheating in professional development exams and misleading customers. A National Australia Bank (NAB) insider sent me an explosive cache of internal documents which revealed NAB had similar issues to CBA, including staff committing forgery and fraud as well as a cover-up by management. Then a whistleblower from the financial services giant IOOF Holdings sent me thousands of documents that disclosed misconduct, including insider trading, other types of market manipulation, misrepresentation of performance figures, and even the boss of its research division getting staff to cheat on his behalf in professional exams.

  The Australian and New Zealand Banking Group (ANZ) was next. Documents I received revealed ANZ had bankrolled a high-risk, agricultural investment scheme, Timbercorp, which collapsed, with thousands of victims losing billions of dollars and owing massive debts.

  When a call came from CBA’s chief medical officer, Dr Ben Koh, that he was about to lose his job in the bank’s life insurance arm after becoming an internal whistleblower, it was a watershed moment. Dr Koh revealed that CBA was putting profit before sick and dying customers. He said CBA was rejecting legitimate insurance claims by relying on outdated medical definitions. It didn’t get much lower than that.

  In March 2016, I presented the story in a joint venture with The Age and the Sydney Morning Herald and in an episode of Four Corners, called ‘Money for Nothing’. In the program, Dr Koh described rampant misconduct, and a series of victims, some dying, told harrowing stories of fighting the bank after it had mercilessly knocked back their life insurance claims.

  The revelations of ‘Money for Nothing’ provoked outrage. It was clear that vast numbers of executives across the financial sector had lost their moral bearing. A parliamentary inquiry into the life insurance industry was set up and the government ordered ASIC to launch an immediate investigation.

  The CBA life insurance scandal was the final straw for Labor, which on 7 April called for a royal commission into banking, bringing it into line with Wacka Williams, who had been arguing for a royal commission since CBA’s 2013 financial planning scandal. Yet the Coalition government remained against the idea and fobbed off these requests.

  Then, finally, on 30 November 2017, the people of Australia heard the news so many had been pushing for. Prime Minister Malcolm Turnbull – bowing to pressure from the National Party and at the behest of the banks themselves – ran up the white flag and called the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The uncertainty had become too great and the government needed to regain control of the situation by setting the terms of reference. Superannuation funds were added to the Coalition’s remit, in the hope it would expose wrongdoing in the union-backed industry funds. The commission would have a tight budget and a short twelve-month timeline, and be prevented from looking at anything that might ‘prejudice, compromise or duplicate’ another inquiry or court proceedings.

  Despite the government’s attempts to constrain it, the banking royal commission managed to dominate the news. Its most prominent figures became household names: Commissioner Kenneth Hayne; senior counsels assisting, Rowena Orr QC and Michael Hodge QC. Their probing exposed rampant greed, systemic gouging of the living and the dead, bribery and corruption in mortgage lending, billions of dollars milked from retirement savings, dud life insurance policies, and financial advisers gorging on fat commissions at the expense of their customers.

  Over the previous four decades, since the deregulation of the financial sector, it had been a free-for-all for bankers. Investors, addicted to high shareholder returns, played their part in a rotten system where banks and financial services companies got rich on the savings of the Australian people. It was only when reputational damage tore through these institutions, and share prices fell, that investors started to care about ethics and reputation. Bankers and executives from the financial sector, politicians and regulators lined up to issue apologies at the royal commission and via the media.

  After the release of the commission’s interim report on 28 September 2018, a grim-faced Anna Bligh, CEO of the peak banking body, the Australian Banking Association, fronted a Sydney press conference where she acknowledged: ‘Our banks have failed in many ways . . . failed customers, failed to obey the law and failed to meet community standards . . . Make no mistake. Today is a day of shame for Australia’s banks.’1

  She was right. It was a day of shame, but it will take more than hand-crafted apologies to win back the public’s trust, given the unconscionable behaviour of the banking and financial sector.

  The damage done to people, the banking sector and Australia’s economy is incalculable and will take years to play out. From the day the banking royal commission was announced to when it finished, a massive $59 billion was wiped off the market values of the big four banks (CBA, ANZ, NAB and Westpac), AMP and IOOF.

  As veteran business reporter and presenter of Sky News Janine Perrett commented: ‘I thought nothing could shock me anymore, but in my forty years as a journo, most of it covering business, I have never seen anything as appalling as what we are witnessing at the banking RC. And I covered the 80s’ crooks including Bond and Skase.’2

  What follows is the story . . .

  Part One

  What goes on in the shadows

  Four decades of misconduct, malpractice and misinformation

  Chapter 1

  Caught in a trap

  The foreign currency loans scandal

  IT WAS A BLISTERING afternoon in January 1985 when John ‘Wacka’ Williams went to see his bank manager at the local CBA branch in Inverell, a small town on the Macintyre River in northern NSW.

  At 4 pm on the dot, palms sweating, wearing smart casual clothes, the thirty-year-old sheep farmer nervously walked into the bank for the appointment he’d made with the manager, Neville Dunbar, to ask for a loan. He needed $200,000 to help him through the drought that had stricken NSW in 1982, the worst dry spell in two decades, which had left him and his brother Peter struggling to pay the bills.

  John Williams was known to most of his friends and family as ‘Wacka’ – a nickname his father, Reg, had given him when he was a toddler. In 1979, Wacka and Peter had sold the family’s fifth-generation farm in Jamestown, South Australia, and moved to Inverell because the land was cheaper. They’d bought adjoining farms spanning 7000 acres of undulating countryside.

  ‘It was tough,’ recalls Wacka. ‘We had a debt of $180,000 and the standard variable interest rates at the time were 15 per cent. We weren’t making enough money to repay the existing farm loan we had with the bank as well as other living expenses, so we had to borrow more money to meet the interest payments and pay other debts.’

  As he sat down with Dunbar, Wacka didn’t realise he was about to be sold a pup. During the meeting, the discussion turned to the benefits of foreign currency loans – in this case one in Swiss francs – which were then offering substantially lower interest rates than standard variable loans. Wacka had heard about foreign currency loans from other farmers and had seen some ads on television, but he didn’t know much about them.

  An appointment was booked for him to go to CBA’s head office in Sydney to organise the foreign currency loan. During that meeting Wacka was shown a series of historical graphs and charts, demonstrating the stability and reliability of the Swiss franc against the Australian dollar. ‘They told me they were in touch with the markets all the time,’ said Wacka, adding that the loans officer assured him the bank would keep him informed and help him manage the loan.

  There was one catch, however. The bank said Wacka would have to borrow a minimum of $500,000 to be eligible for a loan carrying an interest rate of just 6 per cent. When Wacka asked ‘What could go wrong?’, the loans officer said to him, ‘Absolute
ly nothing.’

  By the end of the meeting, Wacka had committed to a AU$640,000 loan in Swiss francs – more than triple the $200,000 loan he’d originally asked for. He wasn’t told about the risks involved in his foreign currency loan, or the skills he’d require to properly understand and manage it. This conservative farmer and grazier was about to become a property and currency speculator.

  In the wake of receiving his bigger-than-expected bank loan, Wacka bought two units as investments, paid off his debts and then placed the remaining $100,000 in a CBA investment account. There, in theory, it would earn a much higher interest rate than he was being charged on the Swiss foreign currency loan.

  What Wacka didn’t realise was that Australian banks were in the process of transmogrifying themselves from service providers to sellers of products – with targets. It was a strategy that would change the way staff related to customers and shatter the special role of trust and respect bank managers had worked so hard to cultivate since Australia’s first bank, the Bank of New South Wales, opened its doors in 1817.

  *

  Around the time Wacka took out his loan, sandwich boards were lining the streets, spruiking financial products and cheap loans. Creative TV ads and posters placed in bank windows promised instant credit. Unrequested credit cards were mailed to customers encouraging easy credit (and high interest rates for the banks).

  The restructuring of the economy and the banks, which had led to this easy credit, can be traced back to March 1983, when the ALP’s newly elected and popular leader, Bob Hawke, ended Malcolm Fraser’s Coalition government’s seven-year grip on power. Hawke’s government would set the stage for a revolution in the financial markets.

  In his election speech, Hawke offered the nation’s voters ‘a program to produce growth and expansion in the economy, achievable goals for re-building and reconstruction of this nation’.1 To begin with, however, the new government had to grapple with a lingering recession that had left one in ten workers unemployed and resulted in double-digit inflation and a larger than expected budget deficit and wages breakout. So how would the Labor government turn the economy around?