What you need to know about the banking inquiry

This week the CEOs of Australia's big four banks will answer questions in the House of Representatives about a mounting list of scandals. 

What is it?
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This week the CEOs of Australia's big four banks will fly to Canberra to answer questions from House of Representatives Standing Committee on Economics about its mounting list of scandals which include, among other things, fraud, forgery, misleading and deceptive conduct, irresponsible lending, unauthorised transfers, selling unneeded insurance coverage, and involvement in a $76 million Ponzi scheme.

The list of complaints dates back to earlier than 2009.

 

Who is being questioned?
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The CEOs of Australia’s big four banks will answer to the committee. They are:

Commonwealth Bank Chief Executive, Ian Narev

ANZ CEO Shayne Cary Elliott

Westpac CEO, Brian Hartzer 

NAB Chief Executive, Andrew Thorburn. 

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How does this differ from a Royal Commission?
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A Royal Commission is a public inquiry body made up of independent non-government experts and members. It follows public processes, seeks community input and then releases a report of recommendation to the government. 

Importantly, a Royal Commission is open to submissions from the public. The banking inquiry is not, meaning that there is no guarantee all complainants will have their problems addressed or compensated.

The banking inquiry is made up only of members of the committee, who are:

Chair & Federal Member for Banks Mr David Coleman (Liberal),

Deputy Chair, Hon Matt Thistlethwaite, Federal Member for Kingsford Smith (Labor)

Greens MP for Melbourne, Adam Bandt

Liberal MP Julia Banks

Liberal MP Scott Buchholz

Labor MP Pat Conroy

Liberal MP Trevor Evans

Nationals MP, Kevin Hogan

Liberal MP, Craig Kelly 

Labor MP Matt Keogh.

The committee will be asked to examine and report back to Parliament on the state of Australia’s banking and financial system. 

A Royal Commission would be underpinned by the criminal code - the Royal Commission Act of 1902, whereby it becomes a criminal offence to fail to comply with a requirement of the commission.

The Commission is also conferred with broad coercive powers of investigation including the ability to subpoena or compel testimony from and cross-examine witnesses, obtain evidence, submit search and arrest warrants, and even phone-tapping, while also providing protection from prosecution for witnesses, whistleblowers and inquiring members. 

The banking inquiry has no such powers.

What will the committee ask of the banks?
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The inquiry will focus on four main topics:

 Profitability

Life Insurance

Financial advice

Remuneration

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Profitability
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Australia’s banks are some of the most profitable in the world; their profits equate to a staggering 2.9 per cent of GDP, according to the Australia Institute.

Commonwealth Bank recently announced its full-year cash net profit of $9.4 billion, (up 3%), ANZ’s profits for the first nine months of the financial year amount to $5.2 billion (down 3%),  Westpac reported its half-yearly profits at $3.9 billion (up 3%) and NAB enjoyed a healthy 6.5% increase in cash profit during the first half to $3.3 billion.

CEOs and senior executives also enjoy multi-million dollar salaries and bonuses. 

However, they have claimed they are are unable to pass on the Reserve Bank's 0.25 percentage point cut owing to increased funding costs. 

Prime Minister Malcolm Turnbull said at the time that if the banks were not prepared to pass on the full rate-cut, “then they should explain fully and transparently to the Australian people and their customers why they have not done so".

Life Insurance
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The Big Four will have to justify decisions they have made regarding denying paying out life insurance claims to sick and dying policy holders.

These questions follow in the wake of joint Fairfax and Four Corners investigation into CommInsure (Commonwealth Bank's insurance arm), which revealed a whole range of unethical behaviour, including knowingly using outdated medical definitions to deny insurance payouts. 

CommInsure ignored the findings of a police and coroner over the accidental overdose death of Nowra resident Peta Outzen, refusing to pay out the life insurance, claiming she had taken her own life. 

They also repeatedly rejected the claim of leukemia sufferer Evan Pashalis on the grounds that he might survive, despite him being given 12 months to live by his doctors.

 

Financial advice
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In 2014 a Senate Inquiry into ASIC uncovered widespread misconduct by financial planners employed by the Commonwealth Bank and found that it had lost its customers hundreds of millions of dollars after financial planners put their clients' money into high-risk investments without their permission. 

Commonwealth Bank is not alone on this. Since 2009 NAB paid more than 750 customers between $10 million and $15 million in compensation

The committee will ask why it has taken the banks so long to compensate the victims of the planning scandal. 

The affected Commonwealth Bank customers, along with consumer watchdog Choice, have labelled the compensation scheme "a joke" which incentivised reviewers to reject claims. 

A Senate hearing on the issue was held in June of 2014, yet little has changed, leading some, including The ALP, to call for a Royal Commission.

Remuneration
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The committee will be asking why its CEOs should continue to take home salaries and bonuses often more valuable than the entire GDP of a third-world country. 

This year Commonwealth Bank's Ian Narev took home $12.3 million, in spite of allegations that it cheated its customers out of hundreds of millions of dollars worth of life insurance claims, two of its former executives being charged with bribery, and accusations its staff is complicit in a $76 million Ponzi scheme.

Last year ANZ's outgoing CEO Mike Smith took home $10.8 million despite the bank is being sued by ASIC for market manipulation in setting the bank bill swap rate.

ANZ allegedly set an artificial price for bank bills which affect commercial and personal loan rates. It also admitted to sacking 16 financial planners in 3 years, paid out $30 million in reimbursements for advice packages that failed to deliver on their promise, paid $13 million in compensation after failing to accurately apply bonus interest to its Progress Saver accounts for years, and $70 million in refunds to home-loan, savings and small business customers after a major glitch caused them to be overcharged. 

National Australia Bank chief executive Andrew Thorburn was paid $5.48 millionNAB has sacked 41 planners in 5 years and has compensated more than 750 customers up to $14.5 million between 2010-2014.

NAB's former foreign exchange trader, Lucas Kamay, was jailed for his part in a $7 million insider trading scheme. 

Westpac's Brian Hartzer received $4.12 million while his predecessor Gail Kelly left with $11.8 million, though it too is being sued by ASIC for its ‘unconscionable conduct’ and market manipulation when it conspired to set the an artificial bank bill swap rate.

ASIC permanently banned a former Westpac home finance manager following conviction of fraud for withdrawing over $113,000 from ATMs after obtaining eight credit cards using false names. It also banned a former trader for creating fictitious trading entities.  

Westrpac is also being sued by a a Queensland businessman for misleading and deceptive conduct after the bank allegedly lost him $4 million in savings by moving him into highly leveraged financial products. 

It also paid more than $1 million in fines over its failure to make reasonable inquiries into its customers income and employment status before increasing their credit card limit.

Given the series of scandals, the committee will attempt to discover whether remuneration is in line with performance.

What can the committee do?
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The committee cannot make a ruling. The commission will report its findings to the Parliament who can draft new laws or amend legislation, but are not required to do so.

It also has no power to bring criminal proceedings against offending individuals or companies.

Treasurer Scott Morrison announced yesterday that the Federal Government would introduce criminal penalties and new regulations to prevent the manipulation of the bank bill swap rate, a move that has been interpreted by some as a Royal Commission avoidance tactic.

Can the government “make” the banks play more fairly?
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The government has the power to make rules that govern how the banks and Australia’s financial institutions operate.

The Prime Minister has argued that the annual publicly televised hearings will drive cultural change at The Big Four, encouraging them to perform better in order to attract customers.

However, the government's unwillingness to hold a Royal Commission, which would have a legally binding outcome, has cast doubt on its enthusiasm for regulatory reform.

Shorten has said that the ALP is committed to a royal commission into the big banks.

“The only reason that the CEOs of the big banks are attending Canberra to a committee meeting is because Malcolm Turnbull has an absolute obsession about stopping a royal commission. But that’s not going to stop a royal commission,” Mr Shorten told reporters in Adelaide on Monday.