Australia’s Financial Institutions Put Profit over Customers, Mis-Sold Insurance: Inquiry

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Australia’s big banks and wealth managers pursued profit ahead of their customers’ interests and saw regulatory compliance as a cost rather than a guide to proper conduct, a scathing interim report from a commission of inquiry said on Friday.

The sector has been rocked by months of revelations of wrongdoing stemming from the Royal Commission, driving down share prices and trashing the reputations of some of the country’s biggest companies.

Commissioner Kenneth Hayne’s report was brutal in its assessment of the industry’s ethical standards and governance while also criticizing efforts by the regulator to police behavior, although it did not immediately recommend any legal action or reform. A final report is due in February.

In almost 60 days of public hearings, the inquiry has heard instances of bribery, fraud, fee-gouging and board-level deception across the industry.

Some of the more shocking allegations included the charging of fees to dead people, persuading a legally blind pensioner to be a loan guarantor without warning her of the risks, and the aggressive selling of a complicated insurance product to a boy with Down Syndrome over the telephone.

The three-volume report blamed a widespread culture of avarice.

“Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?” it said.

The banking lobby said the interim report marked a “day of shame” for the country’s lenders.

“There are no excuses for the behavior that has been exposed by the Royal Commission,” said Anna Bligh, chief executive of the Australian Banking Association.

In separate statements, the Commonwealth Bank of Australia , Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank acknowledged the wrong-doing raised in the report.

They pledged to provide a more comprehensive response in October. The four are due to face questioning over the report before a parliamentary committee next month.

The lack of immediate recommendations helped lift Australia’s financial index 1.6 percent on Friday. The big four banks have lost some A$30 billion ($22 billion) in combined market value since the commission was announced in late November last year.

The report said the inquiry would probe further into whether commission remuneration structures for mortgage brokers and financial advisers – a pillar of the sector’s profitability – could actually serve customers properly.

“Should financial product sellers be permitted to provide financial advice … at all?” the report said.

The final report could recommend major regulatory reform for banks, financial advisers, pension funds and insurers, as well as civil and criminal prosecutions.

In addition to the banks, wealth manager AMP Ltd has taken a huge reputational hit due to the inquiry while the nation’s insurers have also come under fire.

Regulatory Weakness

Treasurer Josh Frydenberg said the report demonstrated a need for the corporate regulator, the Australian Securities and Investment Commission (ASIC), to do more to tackle misconduct in the troubled sector.

“They do need to pursue litigation, to impose the penalties that are available to them, rather than some of these negotiated settlements which have seen the perpetrators of these offenses or misconduct get off too lightly,” he said.

Australia’s center-right government late last year proposed new laws to increase penalties and lengthen prison terms for financial crimes in a bid to strengthen the regulator’s enforcement powers.

In particular, the inquiry found ASIC was too quick to negotiate settlements with banks following breaches.

“Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn-out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct,” the report said.

ASIC said in a statement on Friday that it would work towards building a system of tougher penalties.

($1 = 1.3843 Australian dollars) (Reporting by Colin Packham and Tom Westbrook in Sydney; additional reporting by Paulina Duran and Swati Pandey; writing by Jonathan Barrett; editing by Stephen Coates and Edwina Gibbs)