Regulation: Banking’s dark side reaches Australia

By:
Chris Wright
Published on:

Asic launches investigations; ANZ, Macquarie and CBA probed.

Etienne Alexiou-300

Trader Etienne Alexiou

It used to seem that the Australian banking industry was immune from the afflictions that have blighted the rest of the world’s financial sector. Bolstered and wisely restricted by the Australian Prudential Regulatory Authority, and buoyed by a resource-led economy that largely ducked the global financial crisis, it emerged from 2008 and its fallout in better shape than any other developed country.

But there’s a growing feeling that time is catching up with Australia. 

It started with the mis-selling scandals in the financial planning arms of Commonwealth Bank of Australia, Macquarie and National Australia Bank last year. 

This year, the industry has had to weather a growing storm of concern that it is over-exposed to investment property mortgages, and therefore to the property price crash that commentators in Australia seem to have been predicting for at least the last 20 years. Then, related to this, came an orchestrated campaign against them by hedge funds so devoted to driving the price down that it has drawn comparisons with the film The Big Short. 

Next, ANZ’s internal culture came under fire, when a A$30 million ($22.4 million) unfair dismissal claim by trader Etienne Alexiou alleged a toxic culture of cocaine, sex, booze, bonuses and offensive language, much of it through Bloomberg messages. 

Investigations

Finally, the Australian Securities and Investments Commission (Asic) showed its teeth with three separate actions or investigations in the space of the week: one against Commonwealth Bank’s insurance arm, CommInsure, to see if it is unethically denying heart attack claims; one against Macquarie Bank, whose financial services licence has been curbed for mishandling money over a 10-year period; and, most importantly, an action against ANZ. Following an investigation that began in 2013, on March 4 the Asic announced legal action against the bank for manipulation of the bank bill swap rate. 

The allegations from Asic refer to ANZ’s behaviour between March 2010 and May 2012, rather than to market practices today, and are being closely watched as they may be followed by actions against other banks too. Westpac is also believed to be under investigation.

Cooperation

ANZ is unimpressed. "We have cooperated fully with Asic’s investigation over many months, at a cost of many millions of dollars," says ANZ chief risk officer Nigel Williams in a statement. "This includes actively seeking to resolve the Commission’s concerns since January 2015."

Williams says the claim "is based on a misunderstanding of how bank bill issuance and interest rate risk management operates and the limited case law which applies to this area."

Asic’s statement of claim alleges that ANZ engaged in market manipulation, unconscionable conduct and other unlawful behaviour around the BBSW 44 times. "The BBSW is the central benchmark interest rate in, and is critical to the stability and integrity of, Australian financial markets," the statement says.

CLSA analyst Brian Johnson, one of the most influential in Australia, downgraded ANZ to sell on the back of the news, though this was partly due to a rally in the stock. Although he says a civil penalty is unlikely to be material for ANZ – he’s heard speculation ranging from a few million Aussie dollars to A$300 million – he’s also unimpressed. 

"The other banks have been telling us Asic did not have a smoking gun, but the fact that Asic are citing 44 specific cases suggests Asic have 44 smoking guns," he says. "History suggests ANZ’s response – 'We were just following market practices’ – does not work."

Johnson adds: "One bank can’t rig a market. You need two to execute a trade." ANZ insists that Asic does not allege collusion, but Johnson’s view suggests that other banks may be penalised in the inquiry too. 

At Commonwealth Bank, Johnson reminds readers of chairman David Turner’s statement at the bank’s AGM last year: "We will be the ethical bank, the bank others look up to for honesty, transparency, decency, good management, openness." 

The CommInsure claims management allegations, if true, sit uncomfortably with that claim. 

"This is not like CBA’s only cultural transgression," says Johnson, recalling last year’s financial planning scandals, "and contrasts with the strategy to put the customer at the centre of what they do."

As for Macquarie, it has been found to have failed to deposit money into designated client trust accounts, and for making withdrawals from those accounts that had not been permitted. It will now have to appoint an expert approved by Asic to review its processes for handling client money. 

Macquarie said in a statement that it had already appointed KPMG to do that and was therefore appealing the decision to the Administrative Appeals Tribunal. (Macquarie has a separate financial services licence at the Macquarie Group level that is unaffected.)

Decline

Is there a broad, systemic problem in Australian banking? 

"Over and above present investigations of BBSW benchmark rigging by ANZ staff, we believe bank financial markets earnings are in structural decline given Basel III liquidity and capital reforms," Johnson says. 

On March 7 he told clients to sell into a rally – one that reflected a degree of over-shorting of the sector, he said – arguing that Australian funding costs are still rising on both the wholesale and retail side, that they are under capitalised, and in some cases (notably CBA) just too expensive.