Hayne’s failure to tackle bank structure means that in a decade or so another treasurer will have to call another royal commission

Published:

Andrew Linden, RMIT University and Warren Staples, RMIT University

Every 10 to 15 years it’s the same.

Ever since financial deregulation in the 1980s we’ve had a finance industry scandal followed by an inquiry, a quick fix, and a declaration that it shouldn’t happen again.

In the early 1990s there were royal commissions into the A$1.7 billion Tri-continental/ State Bank Victoria collapse, the A$3.1 billion State Bank of South Australia collapse and the WA Inc collapse which explored the interrelated activities at Rothwells bank, the A$1.8 billion collapse of Bond Corporation and the A$1.2 billion siphoned from Bell Resources.

A decade later in 2003 Justice Owen reported on the A$5.3 billion collapse of Australia’s largest insurer HIH.

And now, bang on schedule, we have Kenneth Hayne delivering the final report of a royal commission into systemic misconduct in banking, superannuation and financial services industry to a government that voted 26 times against holding it.

There are two particularly striking things about the 10-15 year cycle.

One is the rhythm of public inquiries followed by reports, then (sometimes) trials, then books, then almost everyone forgetting (except for those personally scarred) only for problems to resurface later.

The other is that the times between have been punctuated by government-commissioned banking and financial system reviews: the 1991 Campbell Inauiry, the 1996 Wallis Inquiry, the 2010 Cooper superannuation review and the 2012 Murray Review . Each either missed or downplayed the links between poor governance, industry structure, systemic misconduct and prudential risk.

Has Kenneth got the frequency right this time?

Commissioner Kenneth Hayne’s 1000-page final report hasn’t gone far enough to end this cycle.

While his referral of 24 misdeeds for possible criminal and civil prosecution will help in righting past wrongs and perhaps focus the minds of directors and executives, the impact will be generational rather than permanent.


Read more: Compensation scheme to follow Hayne’s indictment of financial sector


The flurry of prosecutions and actions will again reveal problems with the law - gaps in coverage, inadequate penalties and cases the law won’t allow to stand up.

Taken together the recommendations are a patchwork of measures that if implemented will over time be eaten away – and at some point will be dismantled – because the rationale for their adoption will be forgotten.

Even before they are implemented they will have to run the gauntlet of a massive subterranean lobbying effort from industry to water them down, something Hayne indicated he expected.

The deepest flaw lies unaddressed…

Even though Hayne emphasises the link between systemic misconduct, governance, structure and prudential (system-wide) risk, something that Treasury, the RBA and Australia’s three business regulator amigos, APRA, ASIC and the ACCC, have long rejected, he makes no concrete suggestions to tackle it.

As we have written previously, research tells us big systemically important shareholder-focused universal for-profit banks that cross-sell products are more profitable than smaller banks in the good times but are more prone to misconduct and to failure in the worse times.

Australia’s big four fit the bill - they’re big, they have been vertically integrated one-stop shops, they are very, very profitable and they are very focused on shareholder returns.

While the banks, apart from Westpac, have divested themselves of wealth management and insurance arms for now there is nothing stopping them reacquiring them in the future.

This means we are once again 10 or 15 years away from systemic misconduct resurfacing as big banks seek to become more profitable.

…and putting the onus on directors won’t much help

While heads might roll in yet another round of internal investigations to fix bank culture, it is wise to remember that as Adele Ferguson observed ANZ’s internal investigation of the Opes Prime collapse left the bigger governance lessons “unlearned”.

Directors and senior executives of failed companies continue to live charmed lives.

The directors of Babcock and Brown were cheered as they left the building, while friends and family of the disgraced One.Tel director Jodee Rich have resurfaced at Hayne and other public inquiries.

Some of the One.Tel directors have had long corporate careers. The former chair at of the collapsed Allco Finance Group Bob Mansfield went on to review the ABC.

As Adam Schwab bluntly put it, “corporate Australia is nothing if not forgiving”.

It’ll chase horses rather than close doors

Hayne is persisting with a chasing bolting horses approach to misconduct that relies on detection and enforcement.

We have argued this approach is just not as a effective as other alternatives such as two-tier boards and employee directors which have a better track record of keeping stable doors closed and horses tethered.


Read more: Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn


Without them we could very easily have another crisis and another royal commission in 15 to 15 years time.

Ireland has taken a been prepared to change corporate structures. After the meltdown of its financial system triggered by the end of a “classic vanilla property boom” its parliament legislated to appoint public interest directors to the boards of its failed banks.

These changes were designed to ensure banks directors put the public interest first, ahead of shareholders interests and even customers interests.

It’s beyond time we did it here.



Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT University and Warren Staples, Senior Lecturer in Management, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 
Australian Government Business Business & Economy Law & Safety Money & Finance Political
Social:   

The Conversation :
Australia Wide
The Conversation
Showing 10+ recent articles for this business
Shark nets are destructive and don't keep you safe – let's invest in lifeguards 04 December 2019 | As Australians look forward to the summer beach season, the prospect of shark encounters may cross their minds. Shark control has been the subject of furious public debate in recent years and while some governm... More information...
Government’s Commonwealth Integrity Commission will not stamp out public sector corruption — here’s why 25 November 2019 | Attorney-General Christian Porter added a little more flesh to the bones of the long-awaited Commonwealth Integrity Commission this week. In a National Press Club address, Porter argued there must be a balance... More information...
Hackers are now targeting councils and governments, threatening to leak citizen data 11 November 2019 | In recent weeks, Johannesburg's computer network was held for ransom by a hacker group called Shadow Kill Hackers. This was the second time in three months a ransomware attack has hit South Africa's largest... More information...
Mr Morrison, I lost my home to bushfire. Your thoughts and prayers are not enough 12 November 2019 | Fires of unprecedented number and ferocity are today raging in New South Wales and Queensland. Residents in some regions woke to news that the fire danger was “catastrophic”. Rural fire chief Shane Fitzsimmons... More information...
Is the Morrison government ‘authoritarian populist’ with a punitive bent? 04 November 2019 | Although the term “authoritarian populism” is often associated with far-right parties, it has also been used to describe mainstream governments, such as those of Margaret Thatcher (1979-1990). More information...
We asked 13 economists how to fix things. All back the RBA governor over the treasurer 04 November 2019 | Thirteen leading economists have declared their hands in the stand off between the government and the Governor of the Reserve Bank over the best way to boost the economy. More information...
5 charts on what a Newstart recipient really looks like 30 October 2019 | The Newstart unemployment benefit is all over the news. It’s the subject of a Senate inquiry. Today it will take evidence in Elizabeth, in what used to be Adelaide’s industrial north. More information...
Australia needs a Media Freedom Act. Here’s how it could work 22 October 2019 | Australians picked up their morning papers yesterday to find heavily blacked-out text instead of front-page headlines. This bold statement was instigated by the “Your Right to Know” campaign, an unlikely... More information...
Robo-debt class action could deliver justice for tens of thousands of Australians instead of mere hundreds 17 September 2019 | The announcement by Gordon Legal of a class action to compensate victims of the government’s so-called robo-debt scheme is welcome, perhaps even groundbreaking. More information...
Yes, GetUp fights for progressive causes, but it is not a political party – and is not beholden to one 20 August 2019 | Over the weekend, Prime Minister Scott Morrison launched a new assault on the campaigning group GetUp. At the Liberal Party’s state conference in Adelaide, he said GetUp needed to be “accountable for what they... More information...


comments powered by Disqus

All articles submitted by third parties or written by My Sunshine Coast come under our Disclaimer / Terms of Service