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IS THERE A RIGHT TO TRUST? Lessons learned from the Banking Royal Commission, and some big ideas about how to make business work for the community, not the other way round.[1]

(This speech was delivered to the Edith Cowan University Business Flashlight event on Friday 22nd November 2019)



The story I remember most from the banking Royal Commission was that of Grant Stewart. His 26-year-old son, who has Down Syndrome, had been sold life insurance over the phone by a company called Freedom Insurance.

It was harrowing to listen to the telephone call as it was replayed in open court. The young man clearly didn’t understand what was happening – his voice hesitant, uncertain, wavering – while the salesperson bullied him into taking out a policy.

If that wasn’t bad enough, when Mr Stewart tried to cancel the policy, the company did everything they could to stop that happening.

It was so clearly wrong, so clearly unconscionable, I still don’t understand how the people involved could have done it.

But of course it wasn’t just Freedom Insurance –  a company most of us have probably never heard of – doing the wrong thing. This was about our major financial institutions: our largest banks, our insurers and our superannuation companies.

At its heart, the Royal Commission was about a fundamental breach of trust.

There was example after example  ….

  • charging fees to people who were dead
  • selling useless insurance
  • loading people up with debt they struggled to repay
  • trailing commissions in financial advice and mortgage broking – better known as money for nothing, and
  • exploiting vulnerable Aboriginal customers.

The work that I’m involved in – financial counselling – meant we had a front row seat at the Royal Commission.

Financial counsellors work in community organisations and help people struggling to pay their bills and debts.

A number of the witnesses at the Royal Commission initially contacted financial counsellors for support around their debts and then received assistance from community legal centres. This is how they came to give evidence to the Royal Commission.

For me personally, I’ve spent over 30 years in the consumer movement, working closely with the financial services industry.


Outline of speech

That meant that I thought we knew what was happening in the world of banks and insurance – but what we saw in the Royal Commission shocked us, just as much as it shocked the rest of Australia.

So I think the first question we need to answer is what went so wrong.

Commissioner Hayne gave us one answer to that question. I think there are other answers.

I also want to explain why the problems described by Commissioner Hayne are broader than just in financial services.

And finally, I want to talk about solutions – how we need big and bold thinking – to restore community trust.



So let’s start by looking at what Commissioner Hayne said about why things went so wrong.

In a word, he said greed. He talks of profit before people, conflicted remuneration structures, weak regulators, inadequate laws and ineffective boards.

The solutions Hayne recommends make sense in that context. Legislative reform. Billions in remediation. Applying responsible lending laws.

All of those things will make a difference.

But we still haven’t nailed it.

Because despite the Royal Commission, we’re still seeing businesses behaving badly.

Look at what has happened just this week.

On Wednesday, Westpac’s boss apologised over claims that their systems failed to properly vet thousands of transactions that could be linked to child exploitation.

Then we heard that NAB is to compensate more than 300,000 customers who were sold dodgy insurance.

Last week, life insurer TAL was accused of selling junk funeral insurance and breaching the privacy act.

Last month, ASIC said there were significant problems with total and permanent disability insurance – 12 million of us pay for this insurance through our super. It covers you if you can never work again. But some TPD insurance policies are so restrictive your claim would never get approved.



But step back for a moment from financial services …. the problems highlighted in the banking Royal Commission – greed, the pursuit of profit before people –  are just as evident in other parts of our economy.

Energy retailers in the eastern states have been accused of price gouging –  the government has just intervened to set default prices.

In health insurance, there’s now a gold, silver, bronze star rating system to help us work out value for money and compare. But it hasn’t helped. A Choice review found more than 200 silver policies that cost more than gold policies, but for less coverage.

We’re also in the middle of an aged care royal commission, with quite shocking stories of personal abuse.

Then there was the scandal of vocational education, where thousands of students were signed up to courses they have little or no chance of completing.

Debt collectors are making people bankrupt and seeing them lose their homes for debts as little as $5,000.

Mobile phone companies billed their customers for ring tones and games they didn’t want, but they earned commissions, so did nothing about it.

I think you get the picture.



Hayne is absolutely right in pointing his finger at greed.

But that doesn’t really tell us why greed got such a foothold.

So I want to talk about three other causes that also form part of the answer:

  • the first I describe as a failure of ethics
  • the second is a failure of competition, and
  • the third is a failure of shareholder capitalism.


Ethical Failure (Friedman)

To understand the ethical failure, we need to go back to 1970 and economist Milton Friedman.

In a famous and influential article, he wrote that the only purpose of business is to make a profit. He qualifies this of course by saying that any profit has to be within the rules of the game.

But as the Royal Commission demonstrated in spades, and the examples I gave you earlier from electricity, health insurance and so on showed, that isn’t working.

You can stay within the rules of the game, but profit can still come at the expense of broader community welfare.

And of course you do your damnedest to make sure the so-called “rules of the game” are tilted in your favour.

Some 50 years later, we may not talk about the Friedman doctrine down at the pub, but there is no doubt it is still the way many businesses operate.

Its time for a new doctrine – more on that later.



The second cause of the current malaise is the lack of effective competition.

As has occurred around the world, many of our major consumer markets are dominated by oligopolies.

There are five major health insurance providers, four major banks, four large general insurers, three big energy retailers, three mobile phone providers, two supermarket chains and two airlines. In the digital world, Google and Facebook filter our news and mine our data.

What many have in common is what I’ve described as the three “Cs” – the products are complex, the offers are confusing and participation is compulsory – you can’t opt out of banking, electricity or the internet.

There’s a lot of marketing activity, giving an illusion of competition, but it isn’t delivering efficient prices or fair outcomes.


Priority of shareholder interests

The third and final cause is how the interests of shareholders are given priority over those of other stakeholders – including customers, suppliers, the community and the environment.

This is because of the way our capital markets and laws are structured.

We can talk all we like about corporate social responsibility or shared value – and lots of good things happen under those banners – but ultimately money talks.

It’s investors who elect the board and it’s investors who vote on the company’s remuneration report.

And what do they want? Higher returns.

Shareholders love the idea that the purpose of business is only profit. And they certainly don’t want effective competition, because that reduces returns.

You can see this playing out very clearly in the backlash against some very sensible changes proposed by Hayne to remuneration.

He said there should be less reliance on financial returns and more on non-financial metrics.

APRA was tasked with implementing that recommendation and has tried to do exactly that.

But investors and company boards want none of that. They say that the main focus has to be financial performance.



Before I move on to what the solutions might be, it is worth pausing and putting all of this in a broader context. This stuff is really important.

What happens in the world of business isn’t divorced from the rest of us.

We should worry that too many businesses are not contributing to the common good.

We should worry that wages are stagnating and that inequality is growing.

We should worry about a broader loss of trust in government, politics and capitalism.

And we should worry about how this is translating into the rise of minor political parties, unhealthy nationalism and populist politicians promising easy solutions.


Fixing it really matters.


So what do we need to do?

There are a lot of what might seem radical ideas. But all ideas are radical at first – until they’re not.

There is also no one simple solution.

But we have to have this debate in Australia because at the moment, we’re just fiddling around the edges.



I want to set out a range of ideas about what could change.

These are aimed at addressing some of the ethical, competition and market structure issues I outlined earlier.

They also pick up some of Commissioner Hayne’s recommendations.



First, let’s really implement Hayne in the spirit intended.

That means actually fixing remuneration structures, so that it isn’t all about investor returns.

Hayne also talked about an overarching principle of fairness.

That can be taken a step further, so that fairness is embedded in both law and practice.

We’ve long argued for an unfair trading law. But we can’t just keep on piling on new laws.

If fairness is to be the overriding principle that Hayne envisaged, it needs to be applied in a practical way.

To do that, businesses would be responsible for demonstrating that what they did was fair – that means fair processes and fair outcomes.


Higher standards for essential services

Second, we need to impose higher standards on those industries that are absolutely central to our welfare, such as banking and utilities.

Consumers should have a right to trust.

That means no conflicts of interest, that you don’t have to be a full-time consumer making sure you’re still getting the best deal and that business will keep its promises.

If we can’t restore trust in these businesses, there will instead be increasing calls for more radical solutions: breaking them up (which we’re seeing with electricity), or moving back to government ownership.


An overarching paradigm – from shareholder to stakeholder capitalism

And finally, we need to move from our current model of shareholder-first capitalism, to a stakeholder model.

There’s a few things needed to make that happen.

Corporate governance and statements of purpose

One of those is Australia following the lead of the US Business Roundtable. Just a few months ago, it released a new statement on corporate governance, that said CEOs should lead their companies for the benefits of all stakeholders, not just shareholders. That was a huge shift.

But words definitely won’t be enough.

Reduce the power of investors

We also need to break the unfair hold that large shareholders have over companies, that means their interests will always be prioritised.


Radical markets

One way to do this is described in a new book by Posner and Weyl, called Radical Markets.

What they suggest are prohibitions on large institutional investors holding stakes in businesses in the same asset class.

Take our banking industry for example. If you hold shares in our four major banks, the last thing you want is too much price competition between them. If you’re a large enough investor, you’ll be able to influence this. It may be subtle and behind closed doors, but the empirical evidence suggests this is exactly what is happening.

Posner and Weyl argue that the solution is restrict an institutional investor to owning a stake in say just one of the major banks – but not all of them. As an investor, you’d still get diversification, but by buying different assets classes, not by buying within them.


Employees on boards

A stakeholder model of capitalism also shares power. For example, both Jeremy Corbyn in the UK and Elizabeth Warren in the US, argue that employees should be given seats on the boards of large companies. And that isn’t a radical idea at all – it was something Teresa May also championed.



So drawing to a close …

I started this speech telling the story of just one witness in the Royal Commission, Grant Stewart and his son with Down Syndrome.

But I could have talked about any number of other case studies:

  • About Nalini, whose car loan payments were so high she couldn’t pay her rent.
  • Or the McDowall family who lost their home because of appalling financial advice.
  • Or the woman with breast cancer whose insurance company refused to pay because they used a medical definition that was nearly 20 years old.


The reason why the banking Royal Commission was so powerful was that it told people’s stories. It reminded us that this is all about people. Not numbers on a spreadsheet. Or returns to shareholders. Its people.

So I want to finish by proffering a not so new paradigm for business, because it returns to the age-old adage of working for the common good.

Professor Colin Mayer in the UK puts it very succinctly: “profit is only legitimate if it does not harm the rest of society.”

That is well worth remembering.


Because if we don’t we’ll need another Royal Commission in 10 years.



[1] The concept of a “right to trust” comes from my colleague Ron Ben-David, who has been developing a set of principles about what energy and other businesses need to do to meet community expectations.

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