The finance sector, like all addicts, must want to change

Getting rich, having access to powerful people, controlling people’s financial destiny and having tangible expensive signs of status easily available to you is intoxicating. It can, like any drug, become hard to live without and encourages a muddle-headed notion that you are entitled to it, you deserve it.

The trail of destruction of this type of myopically selfish behaviour of the many in the Australian financial sector was revealed over the year-long  Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Ken Henry, Chair of the National Australia Bank, spelled it out in his testimony to the Royal Commission, that somewhere in the neoliberal takeover of the world’s markets of the last 40 years, the PURPOSE, or ends, for a business to exist was to make as much money as possible for those with access to other peoples’ capital. This became more important than providing a suitable, useful or valuable good or service that people wanted to buy.

And unsurprisingly, the Australian financial sector lost its way as it prioritised getting another hit of ‘more’. More money for themselves. More power. More privilege. More stuff.

When a business’s primary purpose or ‘end’ is to provide a good or service that is valuable to and valued by its customer, there is a clear destination. A business can measure how many times it achieves it, how it can improve on it or adapt itself to meet customer requirements. There is a clear compass.

When a business’s ‘end’ turns inward exclusively prioritise its own enrichment, then it has no external reference point, no definitive destination to be reached. More and more is better, greed is good. The end justifies any means to get there, because there is no such thing as enough.

The financial institutions preyed on people’s lack of understanding of their essentially intangible product and, in a display of breathtaking hubris and arrogance, converted the concept of caveat emptor (buyer beware) into ‘we are going to fleece the dumb suckers’ because they felt entitled to do it and it gave them another hit.

The financial institutions also gave a privileged seat to the professional investment teams that provide them the capital they need to exist. These investors, at an arm’s length away from the customers and the employees, focused solely on their investment returns, driving short-term profits to meet their own targets for personal enrichment.

In order to avoid repeating this process over and over, the people with the power to change the destination must want it to change. They must accept that their short-term binge for self-enrichment will ultimately weaken the financial system. They need to accept that they are not inherently entitled to create wealth for themselves at the expense of customers and employees.

A sustained shift to a customer-focused, ethical approach to providing access to capital for businesses and people to thrive is required. Banks and other service providers must understand that there are limits on what they deserve in payment for providing that service.

And we all must accept that the drug of ‘more and more’ is not good for any of us.

Questioning our values more use than a banking royal commission

The criticism of the behaviour of Australia’s financial services industry hit fever pitch in the past weeks with the Federal Opposition calling for a royal commission  into the sector and even the Prime Minister Malcolm Turnbull criticising the big four banks for damaging public trust.

A royal commission might give us all a chance to be outraged at the banks’ naughty behaviour but it would not reveal anything we didn’t already know, nor is it likely to examine the underlying societal value that is the root of the problematic culture.

Two recent forays by financial service regulators into considering the impact of culture on recurrent problems failed to do it, so why would a royal commission be different? That is, a dominant value demonstrated in Western capitalist cultures is the belief that, profit in business has value above all things. And maximizing the profit of a business is more important than the interests of any other stakeholders, including its customers. It is essentially alright to milk your customers for outrageous fees, unsuitable investment products and insurance products that are impossible to claim on, if you are adding to the bottom line for another ‘record profit year’ to report to the market.

Earlier this month, the banking regulator the Australian Prudential Regulatory Authority (APRA) warned that it had some concerns about the level of household debt in Australia and the Australian banks’ exposure to the mortgage market.  ABC’s 730 Report showed a revealing piece of footage of APRA chairman Wayne Byers testifying at last year’s Senate Estimates Committee that the regulator was “a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry had led people to do things that were, you know, really, in our view, lacking in common sense.”

The issue of lending money to secure market share, beyond a point that is a suitable risk for the lender and the borrower, is directly linked to the value of making a sales target to bolster the company’s profits. In a running bull market, the banks allowed their retail mortgage divisions to be focused on market share, and remuneration packages for sales employees will be geared to sales targets. Time and again, insufficient risk assessment of what that exposure is doing to the whole business is ignored or downplayed and the customers are allowed to borrow their way into a disaster.

Meanwhile, the funds management regulator, the Australian Securities and Investments Commission (ASIC) was also pondering the role of culture in driving conduct and conflicts of interests in fund management companies that both create and manage funds and sell them through financial advisory arms that they own. In ASIC’s Report 474: Culture, conduct, conflicts of interest in vertically integrated businesses in the fund management industry, released this March, ASIC pointed out that where a financial services company manufactured an investment product and owned the distribution chain through financial advisory services, there was a strong chance that sales representatives were pressured to sell the ‘own brand’ products, whether they were the most suitable for the customer or not. This feathers the nests of the sales representatives through salary incentives aligned with the organisation’s own profit maximisation strategy. The needs of the people paying for the service, the customers, are secondary. This is a mis-selling scandal waiting to happen.

By failing to consider the values that underpin our culture, we condemn ourselves to making the same mistakes over and over again. These mistakes erode our faith in the financial services sector that is crucial to a healthy economy.

Making a profit is a cornerstone of a healthy business sector, but endlessly pursuing record profits is a short road to poor ethical choices because it turns the focus away from the customers’ requirements and prioritizing a business’s own desires. Rather than just driving up the share prices of companies that make bumper profits, perhaps we should spend more time considering how the profits are made and punish the share price of companies that put their own interests above all others to get their pot of gold.