That the ACCC still deems it appropriate to comment on unconscionability
reflects the ongoing comprehensive ambiguity regarding authority for
unconscionability in the financial sector.
A
Memorandum of Understanding
between the ASIC and ACCC was signed on 15 December 2004 (not available on
the ACCC website). According to a spokesperson, ‘The Memorandum of
Understanding clarifies that the regulation of unconscionable conduct
arising from the supply of financial services will be the role of ASIC, as
intended by the financial services reforms’ (Ridgway, 2005). Yet the ACCC
Guide to unconscionable conduct
notes that ‘… in some circumstances the ACCC will share responsibility
with ASIC’ (Australian Competition & Consumer Commission, 2004: 38).
Moreover, Appendix B to the Memorandum includes under ‘Matters of interest
to ASIC’ the domain of ‘misleading and deceptive, and unconscionable
conduct, and undue harassment and coercion in relation to financial
services including credit’. Appendix B includes under ‘Matters of interest
to ACCC’ the domain of ‘Unfair, unconscionable and/or unilateral conduct
which significantly damages/impacts small businesses’.
This confusion is replicated behind the scenes. A newspaper article
inadvertently disclosed that there is even disquiet in high places (Crowe
& Fabro, 2005):
The conflict between the jurisdictions of the Australian Securities and
Investments Commission and the Australian Competition and Consumer
Commission was slowing some investigations, ACCC Chairman Graeme Samuel
said [before the Senate Economics Legislation Committee yesterday].
…
The Productivity Commission last month described the overlaps between
ASIC and the ACCC and other bodies as a ‘source of confusion to
industry’. Mr Samuel said there was ‘intense frustration’ among some
ACCC staff when they needed to refer matters to senior counsel to
determine whether they had jurisdiction to investigate a case.
The ACCC bulletin,
A
small business guide to unconscionable conduct
(Australian Competition & Consumer Commission, 2005) curiously omits any
mention of financial services and any reference to authority for dealing
with unconscionable conduct in that arena. This is a scandalous omission.2
23
The ACCC pamphlet,
Know how to complain
(Australian Competition & Consumer Commission, 2006) contains the
section headed ‘What the ACCC cannot do’, after which follows
‘Investigate misleading or deceptive conduct in financial services.
These concerns should be directed to the Australian Securities and
Investments Commission …’. Small business agents themselves would be
uncertain as to whether or not they are classified as ‘consumers’. A
legislated monetary limit to claims dictates that the representative
small business cannot be classified as a consumer, but no official
publication outlines a bank complainant’s status or avenue for redress.
What is an aggrieved small business banking customer to make of this
chaos? One could hardly have devised a more dysfunctional arrangement for
regulating unconscionable conduct in financial services than if one had
set out strategically to make it so.
Then there is the Australian Prudential Regulation Authority. APRA was
formed in July 1998, following the Wallis Inquiry emphasising convergence
of financial institutions, consolidating the banking prudential division
of the Reserve Bank of Australia and the Insurance and Superannuation
Commission. APRA’s formal responsibility is system stability, the lynchpin
of which is the risk management that underpins stability of the main
financial institutions. However, how this responsibility for system and
institutional stability extends to responsibility for the full range of
stakeholders is unclear.
APRA’s mission statement is fulsome in its claims: ‘We play a critical
role in protecting the financial well-being of the Australian community:
as a result, high standards are required in everything we do’. Similar
broad claims are made by APRA Chairman, John Laker, in a recent talk (Laker,
2005: 2):
As the prudential regulator, APRA’s mandate is to promote prudent
business behaviour and risk management on the part of regulated
institutions … so that these institutions can meet their financial
promises. In pursuing this mandate, we do not act on behalf of
shareholders or individual customers but on behalf of groups we call
“beneficiaries”. These are depositors, policyholders and pension fund
members, who rely on the continued solvency of regulated institutions
for their financial security but who are themselves not well placed to
assess financial soundness. …
Bank customers are a curious omission from the list of beneficiaries,
but we can be generous in assuming that their omission was accidental.
The context of these grand claims indicates that the beneficiaries
benefit indirectly through the system stability which APRA purportedly
underwrites. That APRA does not act on behalf of individual customers is
understandable, given the formal responsibilities of other authorities,
but there is a fuzziness regarding APRA’s responsibilities towards
‘classes’ of customers.
Even apart from APRA’s failures regarding its core responsibilities
(notably embodied in the collapse of the insurer HIH on its watch), APRA
(and its predecessors) has shown a notable reluctance to take a hands-on
approach to ensuring the generalised ‘financial wellbeing of the
Australian community’. This reluctance is in spite of APRA’s
acknowledgment that the finance sector is unique and therefore demanding
of greater control than for industry in general (Laker, 2005: 4).
The [Basel Committee on Banking supervision] concluded [in a July 2005
report], without qualification, that “minimum standards of corporate
governance for banks should therefore be more ambitious than for
non-financial firms.” …
APRA strongly supports this conclusion. Indeed, we believe it also applies
to all regulated institutions responsible for safeguarding the financial
and physical assets of the community.
There is at best a macroeconomic orientation to APRA’s concerns, and, at a
structural level, with manifestations rather than with root causes. There
is no concern for the temporal casualties of bad practices. This mentality
was present during the mid-1980s and the eruption of the ‘foreign currency
loan’ affair.24
This mentality is present in current concern for potential
irresponsibility in the housing mortgage market, with APRA stepping in
under pressure from Treasurer Peter Costello and the Reserve Bank (Patten,
2007). It is not clear what happened to earlier expressions of concern in
late 2004 by APRA Chairman Dr. Laker over precisely the same issue (Clout
& Boyd, 2004).
24
During the 1980s crisis of the banking system associated with the
profligate creation of a foreign currency loan book for unsophisticated
small business borrowers, the Reserve Bank showed concern (if ephemeral)
for the lack of bank prudence, but no concern for the tragedy that
befell the borrowers. Subsequent events highlight that the Labor
Government saved the major banks involved (in particular, Westpac and
the Commonwealth Bank) precisely by jettisoning justice to the victims.
One particular document that was leveraged from Westpac by disgruntled
borrowers in an imperfect discovery process indirectly attests to the
Herculean detachment of RBA staff during this crisis (Clarke, 1986).
Current APRA Chairman John Laker was then a senior staffer in front line
divisions and communicant with the document’s author regarding Westpac’s
vulnerability. Dr Laker would thus have had the opportunity to observe
the perennial crisis tendencies of the Australian banking system for a
period extending well over twenty years. A one-sided 1993 exchange
between sometime Democrat Senator, Paul McLean, bank victim champion
extraordinaire, and Reserve Bank Governor, Bernie Fraser, highlights the
comprehensive standoff by the regulator during the catastrophe sparked
off by financial deregulation.
McLean sent Fraser a 13 page document, appropriately headed ‘Prima Facie
Evidence of Widespread Corruption in Australian Banks and its
Concealment’, detailing malpractice both in the foreign currency loan
arena and in the generic lending arena, highlighting the systemic nature
of bank malpractice (McLean, 1993). Fraser sent McLean a brief
4-paragraph reply, repudiating the desirability of RBA
investigation of the crisis ‘in the absence of any hard evidence of
specific wrongdoings by individual banks’ (Fraser, 1993).
In
late 2004, APRA’s concern for possibly declining (housing mortgage) credit
standards was focused on the bank’s property valuation practices, with the
prospect of ‘drive-by or desk’ valuations being introduced and generalised.
This concern is entirely appropriate, but its ambit is unnecessarily
constrained. APRA acknowledges that the profit imperative can generate
dangerous corner-cutting practices, but its label for this tendency
(‘creative tension’, c/f Clout & Boyd, 2004) belies a smug confidence that
this tendency can be readily harnessed. In response to a journalist’s
recent query, Dr Laker claimed that ‘We've got a robust regulatory
framework’ (Patten, 2007).
The claim rests more in hope than in substance when it comes to detail.
APRA has never pursued the subject of its initial concern to its logical
implications, from which lax practices can merge neatly into corrupt
practices.25
25
In April 2004 I sent a copy of my dossier detailing eight case studies
of victims of the NAB (Jones, 2004a), accompanied by a covering letter,
to Laker. Receipt of the dossier was not even acknowledged.
In January 2005, banking consultant John Salmon sent a dossier to Laker
in response to the late 2004 disclosure of APRA’s interest in the asset
backing of housing credit (Salmon, 2005). Salmon argued that concern for
property valuation practices deserved to be extended to practices in
business lending, especially to small business. Salmon highlighted a
pattern, especially within the NAB, of manipulation of security values.
There may be an initial inflation of asset security values to capture
business and to facilitate approval readily within the local lending
manager’s authority. Then if the bank seeks to foreclose on a borrower,
the latter’s securities will be deflated, often dramatically. The
initial inflation is strictly an internal affair, but the process of
deflation typically involves external valuers and the consequent
corruption of their integrity. Salmon received a reply from APRA’s
Secretary on 1 February 2005, noting ‘I acknowledge receipt of your
letter and will formally respond once the issues you have raised have
been investigated’. No response was forthcoming, and the issues raised
have clearly not been investigated. A subsequent inquiry from Salmon in
April as to the status of the investigation (again accompanied by a
submission of substantial length, documenting another case of
significant import) received no reply.
APRA possesses a formal power that no other regulator possesses – that of
the right to intervene in a bank’s operations. One needs to be reminded of
this power because it has been so rarely invoked. APRA’s intervention in
the National Australia Bank’s exchange desk corruption was a rare instance
of this power in effect. The subsequent report and directions over NAB
operational detail display what can be done (Australian Prudential
Regulation Authority, 2004). The bank departments responsible for impaired
assets are crying out for a forensic audit of procedures and culture,
especially those of the National Australia Bank and the Commonwealth Bank
of Australia.
However, the NAB exchange desk scandal fell into APRA’s lap, upon which it
was aroused from its somnolence and to which it has subsequently returned.
There are thus weapons in APRA’s regulatory arsenal that have the
potential to assist bank victims but the prospect is that they will never
be so used.
In
short, the edifice centred on the regulatory bodies that preside over bank
behaviour has evolved into a complex phenomenon from which bank victims
can expect energy consuming and frustrating involvement, with the prospect
of nil assistance at its end.
There are contradictory signals from the regulators – on the one hand, ‘we
are here to assist and we have powerful mechanisms at our disposal’; on
the other, ‘the competitive process at the heart of our system is a
dog-eat-dog process, look inwards at your own failings and develop your
own capacities in order to avoid failure’.
Individual contact between complainant and regulatory staff is met almost
uniformly with rejection, if occasionally after a period of ‘going through
the motions’. Regularly, advice is given to complainants to try other
bodies – the Banking Ombudsman, or the ACCC, for example – when the
advisor should know that acting on such advice will turn out to be
fruitless. At bottom, the complainants are advised that the most
appropriate arena of action is in the courts, that great leveler and
bringer of justice, when the advisors would know that the prospects of the
complainant getting redress in the courts is close to zero.
It
is plausible to infer that the overall unhelpful stance of the regulatory
bodies is a product of the internalisation of an adverse environment26
–
the shortage of resources; the extraordinary paucity of legal precedents
favouring bank complainants; the aggressive stance of the general
corporate business lobby against better legislative protection for small
business; the indifference and/or cowardice of the political class; and
the prevalence of a generally unsympathetic intellectual culture on which
regulatory staff have been nurtured. But binding all these elements is the
profound power of the banks, the dimensions of which have never been
documented but whose might is observed episodically whenever that power is
threatened.
Complainants against bank malpractice thus confront a paradox – an
elaborate regulatory infrastructure with apparent substance but tangible
hollowness. Why regulatory staff as individuals participate in this
illusion (apart from the attractive superannuation package) remains a
mystery.
26
c/f
footnote 21.
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9
History of Banking Fraud:
The Coming Battle
