Banks fail first test and it doesn't impress Commissioner Hayne
Day one of the banking royal commission was a tone-setting moment - an opportunity for our four big banks to demonstrate co-operation, contrition and recognition that over the past 10 years they had regularly fallen short of legal and community expectations.
They didn’t cover themselves in glory.
The first test was their provision of submissions that had called for by Commissioner Kenneth Hayne - in other words self-confess about misdeeds with openness.
Yes all admitted that at various times they had engaged in misconduct or poor conduct - a point that has been made abundantly clear over the past seven years, as financial institutions (mainly the banks) have been required to give back $250 million to 540,000 to home loan customers alone thanks to a reliance on fraudulent documentation, breaches of responsible lending obligations and processing/administration errors.
Three out of the four big banks - ANZ excepted - received a rebuke from counsel assisting, Rowena Orr, for presenting submissions that were in some way deficient - with a particular attention reserved for the Commonwealth Bank which had swamped the commission with spreadsheets.
Orr said the "National Australia Bank failed to provide comprehensive information" and that Westpac had on Monday night identified further examples of potential misconduct that were not included in its first two statements to the commission.
It was an inauspicious beginning to hearing and one that will not have impressed Hayne who later in the day was clearly irritated by a last minute request by NAB's counsel during Monday afternoon’s session about the confidentiality of some exhibits.
In what appeared to be exasperation at a point in the afternoon when NAB banker Anthony Waldron was being questioned on ‘introducer’ loans program, Hayne interrupted proceedings with a bit of straight talk.
He told those gathered that of part of what he has to do is assess what banks have made of complaints and revelations.
He emphasised that its a large industry with large participants and things go wrong through dishonesty, neglect or coincidence.
"One thing I may have to look at is the attitude of participants to the notion of obedience of the law that governs the way they conduct their affairs", to which he added, "the difference between a breakdown of controls and a breakdown of the laws. I don’t want people ignoring that these ideas are on the table".
The first of the banks under the spotlight was NAB and the focus of evidence by Waldron was the introducer loans - a program ultimately referred to the Australian Investments ASIC in 2016.
This particular scandal appears to deal with a breakdown in the law and the bank’s controls.
This particular scheme was designed to involve non-bank people referring would-be home loan seekers to NAB for which the ‘introducer’ would receive a percentage fee if the customer was signed up.
Those signed up as introducers were meant to come from the ranks of accountants, independent financial advisers, architects, builders, property developers, real estate agents, solicitors and community-based groups.
Clearly people from outside these fields became involved and at one point Orr referred to a gym instructor 'introducer". Indeed despite numerous process guidelines around these introducer loans, there was extensive abuse.
"NAB knows and you know, there was the provision of unsuitable loans, dishonest application of customer signatures, false documentation provided to support loan applications?" Orr asked of Waldron.
Mr Waldron agreed that some bankers created relationships that didn't exist with introducers to make payments to an external third party related to the banker.
NAB has admitted its processes for detecting fraud in the introducer program were ineffective, its processes for managing conflicts of interest were ineffective and its monitoring was ineffective.
Indeed NAB was only alerted to the problems after receiving tips off from two whistleblowers and didn’t register the breaches with ASIC until several months after it was already conducting an internal inquiry.
Waldron agreed with Orr that the behaviour amounted to a breach of the national credit act.
NAB has already sacked 20 staff as a result of the abusing this sales method.
But it was an matter that NAB had referred to in a January letter to the commission as ‘misconduct’.
I expect Hayne would see it as a good deal more serious than that.