As Australia and the UK show, banker-bashing is all well and good, but directors need to be brought to book
Richard Harris says inquiries in Australia and the UK reveal that bad behaviour by banks is rife, but the solution may be to hold senior management accountable rather than delegating to overzealous compliance departments
Politicians usually try to kick tricky problems into the long grass by having a commission of inquiry or a public consultation that we all know is intended to bury the issue until the next one comes along.
Having just been to Australia, I have been following the quaintly named royal commission on the behaviour of banks. Prime Minister Malcolm Turnbull fought hard against it – a royal commission is much harder to kick. Banking is a naturally adversarial practice and conflicts of interest abound, so it is unsurprising that the commission has uncovered banking practices ranging from the merely unpleasant to borderline criminal. Regardless of the merits, newspaper editors have been in headline heaven with banker bashing.
Banks have behaved badly with allegations before the commission including bribery, forged documents, failure to verify customers’ ability to pay back before lending them money, fraudulent documentation, denying processing or administration errors, price manipulation, breaches of responsible lending obligations and money-laundering laws, mis-selling insurance to people who can’t afford it, lying to regulators and charging fees to dead clients.
One case the press loved highlighting was a sick, elderly woman who had her home taken away from her. She had in fact gone into the loan eyes wide open, posting collateral for her daughter’s failed business loan. It may be tough, but that is how banking works.
It reminded me of my ageing aunt who put up her house as bail for her daughter’s university friend. I warned her of the terrible consequences and she ignored me. To be fair, the young man paid his dues and later gave my aunt shares in his start-up dotcom. Sadly, the company was not named after a fruit or a forest.
After the global financial crisis, the British bank RBS was keen to reduce its loan book and referred 5,900 small businesses to its specialist turnaround division. The division found that things happened when they intimidated cash-stretched customers. The better result was that the loan could be recovered along with fat made-up fees, high interest rates and “upside instruments”. The best result came when the company failed and cheap assets could be sold off in rising markets.
The banking regulator said that while RBS “did not set out to engineer” financial difficulty, the bank had a “conflict of interest”. Customers were opportunities not clients, were bullied and threatened with bankruptcy. Staff were told, “Missed opportunities will mean missed bonuses”.
Because regulators are now savvy to banks behaving badly, banking compliance teams have become the bully in the bank, terrifying employees to show regulators that they are doing their job. The sheer number mean that many banking staff are not the sharpest tools in the box. Training doesn’t seem effective and experience is hard to come by.
The lack of experience is a problem. Banks shed experience, with few non-management employees over 40. Surgery and the law are filled with technical experts over 40, but not banking.
Banks are always bemoaning that they can’t get enough “talent”. A highly competent banker (and friend) with 25 years of experience in a local bank was accused of mis-selling to a client. It took me two minutes to see that the accusation was untenable, soon confirmed by a senior independent adjudicator and even the client himself. The staff member’s bosses were spineless and unsupportive. Despite the evidence, the investment-illiterate compliance department, standing as judge, jury and executioner, issued a final warning and docked wages. So the staff member moved their vast experience and undoubted talent elsewhere.
Banking is a conundrum. The bank-bashing from the royal commission findings has led to banks being more restrained in lending in Australia for the moment. That’s not always helpful. It is easy to dislike inexperienced, highly paid, badly managed bankers who only lend money when you don’t need it, often lend it irresponsibly and bully when they can’t get it back – but that is the nature of the business.
The global financial crisis showed that banks have the ability to bring down the whole financial, and economic, system. The money they lend is our hard-earned savings. They are too big to fail, which is why, despite the mess-ups, they remain special and have to be bailed out. In which case, if banks are so important to society, perhaps lending should become a regulated utility – and the top directors personally held to account. That’s why they get paid the big bucks.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com