After years of intensifying pressure from insider whistle-blowers, consumer groups and many political commentators, the Royal Commission into Banking (BRC) was established in late December 2017.
As the Australian retail banking landscape is dominated by the “Big Four,” the Commonwealth Bank, ANZ, Westpac and The National Australia Bank have been key participants in the BRC. These four banks, along with a number of smaller financial companies being investigated (including Aussie Home Loans, and AMP ), hold assets valued at over $4.6 trillion, compared to Australia’s 2017 GDP of $1.69 trillion. More organisations are expected to be asked to participate as the commission progresses.
As of June 2018, the commission has uncovered some gross misconduct within the banking sector. Specifically, fraud in the financial advisory and lending industry, as well as evidence of bribery, and misleading of industry regulators.
In a huge breach of customer trust, it has been revealed that some banks have been charging their clients for financial advice that consisted purely of selling them their own financial products, in a method described by the Commonwealth Bank as “Vertical Integration.” This constitutes a conflict of interest, as was reported by ASIC earlier this year. The report describes that in 75% of cases reviewed, the financial advisors failed to comply with the best interests of their customers. Insurance sales have also come under the spotlight – with clients being sold insurance packages that are not in their best interest.
Also unveiled was the dishonest lending practices of these institutions; among other allegations, the process of checking financial credentials of clients applying for home loans were almost non-existent at times. Westpac’s conduct has been criticized and may even be proven as fraud – brokers from Aussie Home Loans were falsifying letters of employment for customers to send to Westpac, which required no further documentation from applicants in order to approve the mortgage. Three brokers were convicted of fraud, however in a telling sign of how these institutions work, clients of the brokers at Aussie Home Loans were not notified that they had been fired for misconduct, but only told that they had left the company.
Fees charged to clients have been another focus of the investigation, with Commonwealth Bank admitting to have charged ongoing fees to deceased clients, for up to a decade. The fees related to financial advice – where no proof of the services provided could be found.
The commission’s most recent focus has been on business loans, with questions arising about the legality of CBA’s foreclosure of a myriad of Bankwest business loans after purchasing the lender in the months after the financial crisis. ABC reporters have been astounded to find that banks have great power “to unilaterally alter [business loan] conditions and breach businesses, even when they are meeting their repayments and there is no immediate danger of them failing to pay. Banks also appear to have a lot of power to interpret contract terms in their favour.” .
Bribery, forged documents, lax financial checks, high fees for services that don’t exist and lying to regulators are just the beginning of what could lead to a huge overhaul of Australia’s financial institutions. Bear in mind that the BRC is just the latest investigation into scandals at these companies – follow this link to see a list of some of the most recent ones.
The BRC will continue throughout 2018, with the final report due in February 2019. Of course, anything can change between now and then, but we will be keeping a close eye on the outcomes of the commission. In the meantime, Australians will have to decide whether they should continue to trust these institutions.
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