The big banks will learn the customer is always right

Now that an election has been called, we can expect the prospect of a Royal Commission into the banks will receive even more airplay. A report by the Parliamentary Joint Committee on Impairment of Customer Loans released last week highlights common ground as well as some differences in opinion as to how the major parties believe poor bank behavior should be reigned in.

The Committee was comprised of 12 parliamentarians, seven from the Coalition (including the retiring and respected “father of the house” Phillip Ruddock), four from the Australian Labor Party and one independent. The report, which took nearly 12 months to complete, involved many public and private hearings as well as the review of 195 submissions, including one each from the big four banks.

The Committee determined that there has been, albeit in a minority of cases, a persistent pattern of abuse of power in the relationship between lenders and borrowers.

Banks vs borrowers

The National Australia Bank’s submission was representative of the stance of all the banks in that its modus operandi is to work constructively with customers, employing a case management approach where each customer is assessed and managed in response to the unique issues.

On the other hand, many individuals and small business owners alleged banks had engaged in a range of illegal actions, or actions that breached the Banking Code of Practice, including claims of aggressive conduct in shutting down loans and bank practices. This made it difficult for small businesses to gain alternative financing and retain their businesses as a result of the loan impairment.

Recommendations

The Committee made a number of recommendations, including new and improved regulation, legislation and banking practices that would:

• prevent banks profiting from defaulted or impaired loans;
• require bank officers to act in the best interests of customers and to prohibit incentive structures that reward behaviours that might be in conflict with this requirement;
• enshrine borrower’s rights in the banking codes of practices;
• extend rights afforded to individuals under the National Consumer Credit Consumer Credit Protection Act to small business borrowers; and
• enhance the role of the newly established office of the Australian Small Business and Family Enterprise Ombudsman.

Coalition vs ALP position

There was a dissenting view between the two major political parties about whether the evidence submitted was sufficient to conclude there was widespread or systemic illegal or unethical behaviour by banks. Labor members believe there is more evidence of banking misconduct that needs to be investigated and this should be considered as part of any Royal Commission into the financial services industry.

A Royal Commission or not?

The call for a Royal Commission into the banks is understandable although possibly misguided. No doubt the ALP has a political motive, with former NAB chief Don Argus describing it as “a political tactic worthy of Paul Keating”. Argus further claimed that a Royal Commission could cause overseas lenders to question Australia’s stability and inhibit economic growth.

On the other hand, ongoing scandals involving wealth management, financial planning, insurance and the manipulation of the bank bill swap rate have tested the patience of politicians, regulators and the general public alike. And the way banks treat whistleblowers before and after the event gives rise to concern about how serious they really are about eradicating bad behaviour within their ranks.

The banks aren’t helping their cause by failing to embrace Comprehensive Credit Reporting that would enable customers with good credit histories to use this information to their advantage with their existing or potentially new bank.

It seems many Australians, most whom one way or another are bank shareholders, believe bank leaders have placed the interests of the shareholders ahead of other stakeholders, including but not limited to customers and staff. A more extreme but not uncommon view is that bank leaders have placed their own personal interests ahead of all other stakeholders, even the shareholders.

It’s not surprising therefore that so many people have a negative view about the big banks. A recent Fairfax Ipsos poll revealed 65% of voters support the ALP’s call for a Royal Commission while only 25% oppose it.

This sentiment was summarised by award winning Fairfax investigative journalist Adele Ferguson who recently concluded: “the banks left to their own devices wont put customers first, they will game the system based on a culture motivated by profit more before all else”.

Banking needs new leaders like NAB’s new chairman Ken Henry, who recent said that “a bank which puts the customer at the centre of everything it does should not need regulation”. This brave and bold call regarding the primacy of the customer should be applauded. 

Perhaps sensing the social and political mood, bank leaders are making some encouraging public commitments to change, including to review pay incentives that encourage staff to put the interests of the bank ahead of customers.

Given past bank conduct it is little surprise that customers are not prepared to trust that banks will always do the right thing and accordingly they need protection. Whether this comes from a Royal Commission, the implementation of the recommendations of this parliamentary committee or some other means only time will tell. But the message is clear, Australians are demanding better behaviour from their banks and one way or another banks will come to accept the fundamental principle every small business owner understands – “the customer is always right”.

Neil Slonim is the founder of theBankDoctor.org, a not-for-profit online resource centre that helps business owners deal with the challenges of funding their business.