Thank you to the Melbourne Institute and The Australian newspaper for the invitation to speak today.
I would like to acknowledge the traditional owners of the land on which we are gathered and pay my respects to their Elders both past and present.
It's an honour to join the list of speakers that have been presenting to you over the past two days.
The topic of this year’s conference – New Directions in an Uncertain World is a very appropriate theme to focus on.
Right now it seems that uncertainty has never been more certain.
We are living in a time of massive technological change and opportunity but also a time of rising inequality, stagnant real wages, growing job insecurity and escalating costs of living.
It’s timely to take stock of where we are.
To evaluate our policy successes and failures and to explore new directions towards a more inclusive and prosperous nation.
Today I will outline the reasons behind Labor’s call for a Royal Commission into the banking and financial services system.
I will do so against a background that acknowledges the critical role that banks play across our economy and our community.
Labor believes that the strengths of our banks and our regulatory system has served Australia well, particularly in the tough times, but we cannot be complacent.
Every Australian uses a bank.
We all rely on the strength, stability and integrity of our banking system.
Australian families trust banks with their home loans, small businesses count on them for capital, and older Australians depend on banks for securing their retirement savings.
A strong and profitable banking system is in our national interest and critical to supporting our continued economic growth.
It provides finance to keep the economy functioning by funding vital services, infrastructure, private assets and businesses and we need to look no further than the Global Financial Crisis to appreciate the close linkages between the financial system and the broader community.
I remember that time clearly as I had only recently been appointed to the Treasury portfolio in the ACT Government. As a new Treasurer, I had been comforted by the words of my boss that all I needed to focus on was my first budget which wasn't due for another eight months or so. Plenty of time to get across the detail.
That was in November 2008, about the same time that global financial systems went into meltdown.
Kevin Rudd as Prime Minister and Wayne Swan as Treasurer reacted to these global events quickly and confidently.
They were keen to ensure that Australians were protected from the very real effects of a financial meltdown that were being experienced overseas.
Through COAG meetings and Treasurers’ forums that I attended, I witnessed first-hand the sweeping response from the Federal Government. The usual “blame game” politics that infiltrated most Commonwealth/State meetings, particularly when it came to questions of expenditure disappeared entirely.
One of the other standouts for me from that time was the way in which the banks worked with, and alongside, the Government of the day to protect and support the Australian community.
It was a very clear example of the Government and the banking system working together to instill much needed trust and confidence across the community.
It was in each other's interest of course, but most importantly – it was in the national interest as well.
Labor wants Australia‘s banking and financial system to be strong, profitable but also one that works for consumers.
I think we can all agree that the banks are strong, and this week the prudential authority has provided its assessment of what is required to make them “unquestionably strong” and ensure protection against any future global shocks.
And we know they are certainly profitable.
Last year saw combined profits for the big four reach $30 billion.
So the question that remains is, are the banks working for customers?
But before I get to this question I would like to reflect briefly on Labors position on the Four pillars policy as well as vertical integration.
The four pillars policy is a policy that Labor supports.
It has been supported by Labor in government and in opposition.
As Shadow Treasurer Chris Bowen said in February 2014, “Labor built the four pillars; Labor will defend the four pillars. The last thing the Australian banking system needs is less competition.”
The Murray Financial Services Inquiry also found that the four pillars policy should be preserved.
We do not want to see any lessening of competition in the banking system.
The FSI also noted that while competition in the financial system generally appears adequate, the high concentration and degree of vertical integration in some parts of the system has the potential to limit the benefits of competition in the future.
It recommended that competition should be should be proactively monitored and this is something that Labor strongly agrees with.
Consistent with the FSI’s recommendation, the Government has recently commissioned the Productivity Commission (PC) to review competition in the Australian Financial System, with a report due next year.
The terms of reference for the PC review include looking at issues such as the degree of vertical and horizontal integration along with implications for competition and consumer outcomes.
This is very important work and one which Labor will closely monitor.
There is no doubt that the size and reach of the banks beyond the retail sector and into wealth management, insurance and super has certainly contributed to some of the poor consumer outcomes across the sector in recent times.
Under Labor‘s approach the business structures of banks, including vertical integration, will be a matter for the Royal Commission to consider – to review the body of evidence and provide recommendations for a banking system that works for Australian consumers.
Now to return to the question of whether Australia’s financial system is working for its customers.
Any assessment of the system over the past decade can not ignore the fact that the sector has been plagued with examples of;
- illegal activity,
- unethical practices,
- irresponsible and dodgy lending,
- poor advice,
- fraudulent activity,
- unfair contracts,
- inappropriate cross-selling of products,
- the targeting of whistleblowers
- a workplace culture that rewards aggressive sales techniques and, a sector that appears to prioritise profit and the protection of market share at any cost.
These things can't simply be attributed to fall-out from the GFC.
Over the past 18 months alone there have been more than $300 million in fines imposed or compensation paid to customers by the banks.
These were for:
- bad credit limit practices,
- breaching consumer protections,
- unclear fee disclosures,
- fees for no service provided,
- failing to waive bank account fees for eligible customers,
- conduct in wholesale spot foreign exchange businesses,
- wrongly charging fees to superannuation fund members, and,
- wrongly denying insurance claims.
And this isn't even a complete list.
But while this list on its own is important, so too is appreciating the enormous toll on people when the financial system lets them down.
Late last year, I met with a couple without a cent to their name but who had managed to travel across the country to tell me their story.
They turned up to Parliament House without any ID so they weren't allowed into the escorted areas and so this proud and dignified couple told me their story whilst we huddled on a bench in one of the public galleries.
This was a ‘normal’ Australian couple – the kind of people who live next door to you. They could be your aunt or uncle.
In 2012 they were door knocked by a person spruiking investment properties in Queensland.
This person seemed professional; they knew what they were doing; They had all of the information and it seemed like a good deal.
The couple in their early 50s at this point, and already worried about funding their retirement believed the opportunity sounded right for them.
So after going through all the paperwork they bought an investment property, after their bank approved the loan.
They were comforted by the banks agreement to lend the money and incorrectly (as it turns out ) believed that this approval legitimised the investment property strategy for them.
Financially, things got a bit tougher for this couple when one of them got sick and the other lost their job.
Realising that they couldn’t cope with meeting the loan repayments on the property they started preparing to sell it.
But it turned out that the property was worth a lot less than what they had paid for it. If they sold at this price, there were going to be left with a significant debt to the bank, which they couldn’t pay off - as they were by this stage totally dependent on the pension.
To their shock they found out that their bank had known this before they even signed on to the loan. The valuation done for the bank during the loan application stage found that the property was worth significantly less than the amount that they were borrowing to pay for the property. The loan documents processed by the broker also inflated their income and didn’t truly reflect the cost of their expenses.
This was not known by the couple at the time of loan approval – and the bank and the broker never told them.
There was a further problem. Under the nature of their loan, the monthly repayments were set to increase further to be double their original amount by 2017.
So now they were stuck, struggling to meet the cost of their loan payments – but they couldn’t sell.
The bank’s advice was to meet their loan repayments by re-mortgaging their family home. That is – borrow more.
Luckily they didn't do that.
The only option it seemed to them was to sell their investment property and the family home to pay off the debt.
This would leave them renting, on a pension and without any retirement savings.
Two lives spent working hard jobs, hard physical jobs, to save for a better life in retirement and left like this - innocent victims of a system designed to serve other interests, certainly not theirs.
This example, and the thousands just like it, give a little taste of the powerlessness that people face when they encounter problems in the financial system.
There is no doubt the financial system is geared towards the experts and the professionals.
Complex products, clever and targeted selling, capitalising on people’s financial insecurity about the future and definitely the knowledge imbalance.
It’s not just greedy people who are affected. It’s everyday Australians. People whose only desire is to be financially secure.
The rules are not working to protect ordinary consumers.
Some are ashamed to come forward.
Some don’t have any confidence that they will be believed.
Others seek recourse or justice – which is often long, stressful and mostly fruitless.
For many, the system seems geared against the consumer at every step.
Many will try to resolve with the bank before moving onto external resolution though a body such as the Financial Ombudsman Scheme. While some problems are resolved there, often the difficult or complex cases can remain unresolved and others awarded compensation through this channel know they will never see the money.
Another option is the courts. But taking legal action can be a very costly and time consuming thing to do.
Even in the most egregious of cases where there is no dispute who was at fault ̶ it can take years of legal wrangling, reluctance to hand over documents, blame-shifting and the general wearing down of the complainants before agreement is final reached, terms settled, compensation paid and confidentiality agreements agreed too.
Often people choose to give up and get on with their lives – knowing that there has been an injustice but also that they are powerless to do anything else. Others keep fighting, but with an increasing toll on their physical and mental health.
Labor announced its decision to support a Royal Commission into the banking and financial system back in April 2016.
It wasn't a decision taken lightly or without serious assessment of all of the issues involved.
Although it was before my time in this role, speaking with colleagues who were involved, this decision was taken after many warnings to the banks to lift their game and after promises from the banks to improve and respond to consumers ̶ were not delivered.
For Labor, as parliamentary inquiry after parliamentary inquiry found failures, scandals, illegal and unethical conduct and as constituents contacted their MP’s around the country with story after story of mistreatment, of bankruptcy, of life savings lost.
You could only conclude from this that there was something fundamentally wrong here.
The single stories of financial devastation, of family breakdown, of businesses lost, and in some cases of lives lost weave together to form a much bigger picture ̶ of a banking and financial system that has clearly lost sight of its customers.
I don't need to persuade you on this. This is all a matter of public record.
The politicians know it; the community knows it; and perhaps most tellingly the banks know it – the CEO‘s admitting as much when they come to Canberra.
Trust and confidence ̶ essential pillars of a well-functioning financial system ̶ have been repeatedly shaken.
And perhaps for those who don't yet agree with a Royal Commission - put yourself in my shoes where during my short 12 months in this portfolio, I've been approached almost on a daily basis with stories of everyday Australians who for a variety of different reasons - (most commonly poor advice and inappropriate or fraudulent lending) have had their lives destroyed by our financial system and the way it operates.
Elderly people returning to work as they have lost their superannuation savings because of bad financial advice;
People reduced to living in caravans on the lawns of their friends because they have had their house repossessed and no-where else to go;
Low income earners facing a lifetime of debt with nothing to show for it because a shonky adviser convinced them they could borrow more money than they could afford and the bank went on and approved it;
Farms and generations of hardwork lost when the bank called in the debts without much notice;
Investors, left with big debts and nothing to show for it, following liquidation processes which lock them out of deals with banks and lawyers.
It's these stories, these experiences – not one, but hundreds and hundreds of them which have led to Labor taking the position we have about the Royal Commission.
Bill Shorten and I have met with people from right across Australia who have been left devastated by our financial system and the way it works.
They, very reasonably, want answers to what went wrong and they want someone to take responsibility.
I do acknowledge the work underway across the sector to respond to areas where banks and other financial service providers have let customers down ̶ this is all worthy work, but let’s not pretend for a moment that it's independent, transparent or that it has the powers of a Royal Commission.
Take the ABA‘s six point plan as an example ̶ the plan certainly has merit and whilst efforts have been made to garner trust in the processes, at the end of the day every report and every response to that report is controlled and paid for by the very institutions whose business strategies have led to these poor consumers outcomes in the first place.
The six point plan is not a Royal Commission.
Over the past year the Government has responded to increasing political pressure to “do something about the banks” and has made various piecemeal announcements which will do nothing to restore the trust and integrity necessary for a healthy banking sector.
If I just take two announcements from the last budget as an example,
I’m you remember the discussion about the big T little T tribunal - to fend off rising backbench anger at the banks the Prime Minister committed to a new tribunal saying that:
“we will get a low cost, speedy tribunal to deal with these types of consumer complaints, customer complaints against banks and this will be real action.”
The budget announced a new body to be called the Australian Financial Complaints Authority.
On closer inspection, this is simply a merging and rebadging of existing the two financial ombudsman services and the Superannuation Complaints Tribunal, with higher thresholds but with no new or additional powers than the existing dispute resolution bodies don’t already have.
We also have the budget announcement about the Banking Executive Accountability regime. The Treasurer lauded these reforms, and I note he has done so again at this conference, saying that:
“… that those holding senior executive positions, if they do the wrong thing, they will be deregistered and we’ll claw back their bonuses.”
At Senate Estimates in May, I asked APRA about the poor behaviour that would lead to someone being reported through this regime.
APRA confirmed that the scheme will be limited purely to poor prudential outcomes - this limitation will not, necessarily, prevent the scandals or penalise the behaviour that has seen such detrimental impact on consumers.
And don't tell me that any attempt to “claw back bonuses“ won’t be managed by the industry by simply increasing, already extremely high base salaries for banking executives.
Labor believes the Governments response to date has been confected and piecemeal. There is a lot of emphasis placed on looking like something is being done when in reality not much is changing at all.
Finally I would just like to mentioning three areas where I believe prompt action is required to immediately strengthen consumer protections across the financial sector.
Credit card reform is one.
We know that Australians own close to 17 million credit cards which collectively owe a whopping $52 billion in debt – that's an average bill of over $,500 per card holder.
We also know that 77% of customers have their primary credit card with one of the big four banks or their subsidiaries despite many other competitors providing better terms and interest rates.
Simple reforms which have been on the table for over a year and which have bi-partisan support should just be done.
The Government promised last year to improve protections for credit cards, including requiring banks to provide online cancellation options, prohibiting unsolicited credit limit increase offers and standardising the application of interest.
It’s been more than a year since the Government promised to move on these reforms and still we haven't seen any legislation.
There is no excuse for these delays ̶ because the longer it takes the more money the banks will make through unfair charging and the more it will cost everyone else with a credit card.
Secondly, lack of consumers protections for Debt management firms are currently leaving people exposed to financial abuse.
These firms promise to clear up your credit history and help you manage your debts ̶ but all for a hefty upfront fee and some will even lend you money should you need to get into more debt to service your current debt.
At the moment these firms are largely unregulated ̶ despite them selling services to some of the most vulnerable people in the community.
Debt management firms currently live in a regulatory void – they’re not regulated as financial advisers nor are they regulated under the consumer credit framework.
In a sense they operate in the financial services equivalent of no-man’s land and its time this changed.
Debt management firms should be regulated, they should be required to sign up to an financial ombudsman scheme like other financial services firms do, they should be required to disclose their fees and be compelled to inform clients about the availability of free alternatives such as community legal centres and financial counsellors.
Failure to respond here will leave vulnerable customers open to financial abuse.
Finally, improving corporate whistleblower protections is also on our agenda.
It's clear that there are major gaps in whistleblower protections in the private sector.
One only needs to mention the name Jeff Morris and read about his experience to understand the need to get cracking on serious reform.
No one should have to go through what he did in the pursuit of the common good ̶ he paid a huge personal price for trying to do the right thing and protect others but in the end had no protections for himself.
There are other high profile examples like 7-11 and with CommInsure as well.
There is a Parliamentary Joint Committee inquiry underway into whistleblower protections which is due to report in August.
We will look carefully at these recommendations handed down then but our starting point will be for much stronger protections in this area.
This should include:
- corporate whistle-blower protections extending to protect former employees (as well as current ones), directors and officers, contractors and others connected to the business;
- protection for whistleblowers who make anonymous disclosures;
- a broader application to cover disclosures of conduct that is unlawful or unethical;
- avenues for disclosure to the media and a right to consult a lawyer for advice;
- access to low cost alternatives to legal action to pursue compensation for whistleblowers ̶ including loss of future potential earnings;
- Much stronger protections against reprisals, and,
- the consideration of how a rewards scheme along could operate.
Today I have laid out the case for a Royal Commission into Australia’s banking and financial services system..
But at the same time, I have not sought to over dramatise or simplify the issues facing our financial system.
Our financial system weathered the Global Financial Crisis well and it has been further strengthened since then.
But we should not be complacent, and as economic and financial circumstances continue to change over time we must be willing to continually assess whether our financial system architecture and governance is as strong as it can be.
My colleague Chris Bowen will have more to say on this soon.
Whilst the banks may not agree with our position on a Royal Commission we continue to work with them, in opposition as we have when in government, and we enjoy a positive dialogue with them despite our policy differences.
We understand that the relationship between a Federal Government and Australia‘s banks is an important one but like most relationships its one that can only work effectively when there is trust, confidence and respect between the two partners.
Establishing a Royal Commission into Australia’s banking and financial system will remain Labor policy because we firmly believe that it’s the only way to have the forensic examination that is required to keep our banking system strong and most importantly one that works for customers.
FRIDAY 21 JULY 2017