After years of dragging its feet over the appointment of a Royal Commission to look into malpractice in the banking sector, the Australian Government is belatedly promising dire penalties for senior bankers who break the law. Meanwhile, the CEO of wealth manager AMP has resigned over the commission's latest revelations about wrongful commissions for financial advice.

The financial advice industry is highly concentrated in the Commonwealth of Australia. The top five entities, the four major banks and AMP, collectively hold a market share of about 48% by industry revenue. As at 1 June last year, there were 5,822 financial service licensees that offered financial advice to consumers in Australia.

The Australian Securities and Investments Commission has told the Royal Commission that as at 28 February this year, approximately 305,946 customers have been paid or promised a total of A$216.421 million by the five financial giants in compensation as a result of fees paid for no service. Of this total amount, A$117.8 million has been paid by Commonwealth Bank of Australia, $49.314 million by ANZ, $41.313 million by National Australia Bank, $4.715 million by AMP and $3.276 million by Westpac. All expect to pay more, with the final total estimated at some A$219 million. (US$1 = A$1.30.)

The sins of AMP

AMP has admitted to the Royal Commission that it misled the regulator about its misconduct on as many as 20 occasions. It has promised the commission that it will open a probe into its regulatory reporting practices under a trusted, impartial public figure. Its CEO and managing director, Craig Meller, has resigned from his job and foregone an equity award that the company was planning to make to him. He is the first senior banker to lose his job as a result of the current enquiries. His successor is Mike Wilkins.

During his interrogation on Tuesday, Jack Regan, the managing director at AMP Financial Services Holdings Ltd, lost count of the number of times that AMP had deceived the regulator about its misconduct, repeating the phrase 'I am uncertain' eight times. Michael Hodge QC took him through a humiliating chain of misleading AMP statements which he had to admit were false. One such assertion was that "when licensees purchase register rights, the normal process is for the ongoing service agreements to be terminated and the ongoing service fees to be turned off."

Hodge quoted from a letter that AMP had told ASIC that it had sent to customers. He read: "When we set up your financial products we negotiated a planner service fee in return for certain additional financial services to be provided to you as AMP will no longer be able to provide you with all those additional services, the planner service fee will be removed."

Hodge said that had those letters been sent to all clients, that would have been a misleading statement to the clients, and Regan agreed that it would. Hodge then, however, disclosed that even though ASIC was told that the letters had been sent to the clients, they had in fact not been sent to the clients. Regan replied, "I understand that to be the case." Meller denied all knowledge of the misconduct.

Other banks' sins

Commonwealth Bank has had its share of opprobrium from the commission also. Its documents, quoted at the hearing, have it charging fees to one customer who had been dead for a decade and charging the estates of other deceased customers. Marianne Perkovic, the head of the CBA's private bank, followed a less contrite path than Jack Regan and attempted to survive her ordeal by occasionally failing to answer questions.

In one memorable exchange, Hodge asked: "Is the reason that you are dissembling in the way you are dissembling because you are trying to pre-emptively explain why it took CFPL [Commonwealth Financial Planning Ltd] more than two years to notify ASIC of its breach?"

She answered: "I am trying to – yes, I am trying to – sorry, I am just trying to explain to you in this two-year period before we actually identified that we actually had a problem with OGS [ongoing services] as to what we were solving for with the information that was in front of us in a broader context of the business."

The commissioner then interjected: "Ms Perkovic, I do not regard that as answering counsel’s question. Please ask the question again. I want you to listen to it and I want you to answer it directly as you can."

One quoted document read: "Advisor provided advice to a client in 2003 who passed away in January 2004. Advisor is aware that the client is dead but the advisor services fee continues to be charged. When asked, he said he didn’t know what to do and he had tried to contact The Public Trustee and had not heard back. The action heading is 'possible warning to advisor.'"

The commission that no cabinet minister wanted

The history of the Royal Commission, which is now finally proving its worth as a forum for enquiry, is a tortuous one. In 2014 a federal senate committee chaired by Senator Mark Bishop of the Australian Labor Party (the party chose to spell its name this way in 1912 in anticipation of a national shift to American spelling that never came) recommended the setting-up of a Royal Commission to look at a recent fraud scandal that had left thousands of customers of Commonwealth Bank of Australia out of pocket.

Subsequent scandals added to a rising groundswell of support for a root-and-branch review of the banking sector, a proposition that the Turnbull National-Liberal Coalition Government (September 2015-present) fought tooth and nail. Indeed, Malcolm Turnbull and his Government voted in Parliament more than 20 times to protect the banks from a Royal Commission. Opposition leader Bill Shorten said recently: "the Turnbull Government is nothing better than a protection racket for the big banks."

Members of the Turnbull Government have been having trouble admitting that they were wrong to block the enquiry. Barnaby Joyce, the deputy prime minister under Turnbull between February 2016 and early this year, has admitted he was 'naive' to argue against a Royal Commission when his party was in power. The prime minister himself, after many statements to the contrary, has only just admitted that in hindsight it would have been better for his Government to have set the commission up two years ago. One day before, Financial Services Minister Kelly O'Dwyer repeatedly evaded questions on the subject.

Bishop's Senate Economics Committee uncovered allegations of fraud, forgery and a cover-up. The Senate report of 2014 disparaged the Australian Securities and Investments Commission's handling of rogue financial planners at the Commonwealth Bank and said that the regulator was too timid and hesitant in its handling of the case. It called for a Royal Commission because it thought that ASIC was not up to the job. Bishop said of ASIC: "It has been slow, it has been unresponsive, it hasn't taken reports seriously, it hasn't pursued investigations properly, agreements that have been reached haven't been enforced properly. Its tale is a tale of woe and clients and people in the wider community have continued to suffer because of their inordinately unresponsive and slow reaction."

The scandals, however, mounted. In December 2016 the Commonwealth Bank and the National Australia Bank were punished after their foreign exchange traders were caught front-running. This form of market manipulation happens when a trader embarks on a trade to capitalise on non-public knowledge of a large pending transaction that will influence the price of the underlying security. In August last year AUSTRAC, the financial intelligence unit, accused the Commonwealth Bank of "serious and systemic" breaches of anti-money laundering and terrorist financing laws.

Now, and rather belatedly, Treasurer Scott Morrison has raised the possibility of savage penalties for corporate criminals, including maximum sentences of 10 years in prison and fines of up to A$210 million for corporations, having previously told the Sydney Morning Herald that the opposition's call for a banking royal commission was a "populist whinge" that threatened to undermine a key pillar of the Australian economy and was a sign of "reckless political games." In another tirade he referred to the clamour for a commission as "nothing more than crass populism seeking to undermine confidence in the banking and financial system, which is key to jobs and growth in this country."

New penalties

If and when it sets new penalties, the Australian Government will have a ready-made template to use. Gerard Brody, the head of the Consumer Action Law Centre, explained to NewsRadio: "The Government does look as though it might respond to the ASIC Enforcement Review Taskforce last year which consulted on a number of measures including an increase in maximum civil and criminal penalties to upwards of A$10 million and more. It's important for those penalties to increase but it's also important for a regulator to ask for those penalties and for courts to award them.

"In other areas that already have high maximum penalties we still see the courts award pretty paltry fines, which (particularly when a large multi-million-dollar business is involved) can be seen as a mere cost of doing business, a slap on the wrist. So higher fines are a good first step but we also need measures to bring about individual accountability among directors and senior managers at our big financial institutions."

The Federal Government announced its intention in October 2016 to set up the ASIC Enforcement Review Taskforce to "assess the suitability of the existing regulatory tools available to ASIC to perform its functions adequately, whether there is a need to strengthen ASIC's enforcement toolkit and if so, what that might look like," in the words of Kelly O'Dwyer MP, the Minister for Revenue and Financial Services. The Taskforce report went to the Government in December last year. Chapter 7 suggests stronger penalties for misconduct in the financial sector or, as the report puts it, in the "corporate and financial sectors."

At the moment, the law that ASIC administers contains a wide variety of criminal offences and civil contraventions. Under the Corporations Act the maximum civil penalty that an individual can pay is A$200,000; for a corporation it is A$1 million. ASIC may also extort money from people and firms in exchange for not issuing writs against them, presumably without the law of blackmail coming into play as it might if a non-governmental corporation were to try to strike such a bargain.

A governmental Financial System Inquiry concluded in 2014 that existing civil and criminal penalties were unlikely to deter misconduct by large firms and recommended far harsher ones. The taskforce agreed and said that maximum civil penalty amounts in all ASIC-administered Acts should be A$525,000 for people and A$10.5 million for corporations or three times the value of benefits obtained or losses avoided or 10% of annual turnover in the 12 months preceding the contravening conduct. It wants to subject all this to a system of 'penalty units' by which these penalties might change with time.

The Corporations Act, ASIC Act and Credit Act and the National Credit Code impose penalties for crimes that ASIC is responsibility for investigating. These Acts and various parts of them have emerged disparately over time, giving rise to inconsistencies in the penalties they impose. In 2010, the Federal Parliament increased penalties for insider dealing, market manipulation and dishonest conduct in the provision of financial products and services in the Corporations Act. The maximum term of imprisonment was doubled from five to 10 years and maximum fines were increased for people to A$945,000, or three times the value of the benefits obtained for individuals, whichever is the greater, and for corporations A$9.45 million, or three times the value of the benefits obtained, or potentially 10% of annual turnover in the preceding 12 months, whichever is the greater. Maximum penalties for other offences under the same Act that involve dishonesty remain at a maximum of five years’ imprisonment and/or A$420,000. All sums are likely to rise as penalty units lose their dollar value over time.

The Royal Commission will continue to look at wealth issues at big banks during the coming week. Later on, it intends to look at insurance and lending to small businesses in much more detail.