Citizens Electoral Council of Australia

Media Release Thursday, 1 February 2018

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://www.cecaust.com.au

ASIC report more proof Australia needs Glass-Steagall banking separation

A report by Australia’s investments watchdog ASIC (Australian Securities & Investments Commission) reveals that the vertically-integrated structure of banks makes it easier for them to fleece their customers. The vertical integration of banking, also known as universal banking, turns banks into supermarkets for all kinds of financial services—deposits and loans (commercial banking), investments, insurance, stock broking, financial advice, etc. ASIC’s report provides yet another reason Australia needs to break up its banks with a Glass-Steagall separation of commercial banking from all other financial services.

The ASIC report, “Financial advice: Vertically integrated institutions and conflicts of interest”, released 24 January, reviewed the financial advice provided by Australia’s five biggest financial institutions: CBA, ANZ, NAB, Westpac and AMP. This has been a scandal-ridden sector of the financial system for more than a decade. The complicity of banks in such financial debacles as Storm Financial, the Timbercorp and Great Southern managed investment schemes, Opes Prime, and many others, has left thousands of Australian families ruined.

The report’s findings were entirely predictable. Nearly 70 per cent of the funds that banks advised their customers to invest went into in-house products sold by the same bank. This was despite the fact that nearly 80 per cent of the investment products that bank staff were authorised to sell were from other institutions. In other words, bank staff had a clear bias in pushing their bank’s products. Anyone who has queued at a bank simply to cash a cheque or such-like only to have the teller recommend insurance or some other product has experienced this bias.

For its report ASIC tested the advice bank staffed provided to customers to see whether it satisfied the requirement that banks give advice in the “best interests” of the client. The report found that in 75 per cent of the cases ASIC reviewed, the advice did not satisfy the “best interests” requirement. Moreover, in 10 per cent of the cases ASIC found the advice “was likely to leave the customer in a significantly worse financial position”. Given that the five biggest financial institutions have well over 80 per cent of the Australian population as clients, this 10 per cent figure represents a huge number of potential bank victims.

Old problem

ASIC’s report is not surprising. Under the neoliberal law of the financial jungle, predatory banks will prey on their customers—if they are allowed to. The question is, why have they been allowed to?

This problem was addressed and solved 85 years ago in the USA. In 1933 hearings of the US Senate banking committee, legal counsel Ferdinand Pecora exposed that the biggest Wall Street banks, most notably National City Bank, the forerunner of today’s Citigroup, had aggressively targeted their depositors with dodgy investment advice. National City had unleashed an army of bond salesmen on to their customers, who were talked into buying bonds of all sorts, including the debts of failing banana republics. Often, the bonds National City sold to their unsuspecting customers raised funds that were used to ensure loans were repaid to National City—the bank was simply transferring losses it should have worn for bad loan decisions on to its unsuspecting customers.

The Pecora hearings led to the new Franklin Roosevelt administration passing a raft of laws to protect consumers from financial predators. Foremost among them was the Glass-Steagall Act 1933, which walled off deposit-taking commercial banks from securities trading, insurance and other financial services. Banks no longer had investment arms into which they could lure customers. As well as consumers, Glass-Steagall protected essential banking services from risky financial speculation, until corrupt, deregulation-crazed Wall Street bankers and Washington politicians succeeded in having it repealed in 1999.

Australian MPs: Break up the banks!

Now, more than eight decades after the Pecora hearings and the passage of the Glass-Steagall Act, ASIC has similarly discovered that “Conflicts of interest are inherent in vertically integrated firms”. In response to ASIC’s report, some of the leading bank critics in Parliament have again raised ending vertical integration, which means breaking up the banks. “Nationals Senator John Williams said it may be time that was addressed”, Crikey.com.au reported 25 January. The Australian of the same day reported Greens Senator Peter Whish-Wilson saying, “This needs to be one of the core issues the Royal Commission has to look at and the commissioner shouldn’t be afraid of recommending breaking up existing vertical integration within the big banks.” In December the Nationals and Greens had agreed to have vertical integration included in the terms of reference for a banking inquiry, but at the banks’ behest Prime Minister Malcolm Turnbull jumped in at the last minute to take control of the process, announcing a royal commission with terms of reference that excluded everything the Nationals and Greens had agreed on, including vertical integration.

ASIC’s report is the latest example of an Australian banking problem, to which the solution is Glass-Steagall. In early January, Small Business Ombudsman Kate Carnell called for banks to be classed as essential services, which Glass-Steagall does in principle. And for a number of years Carnell and other voices in the business community, including former ANZ Bank director John Dahlsen, have criticised the banks for starving small businesses of credit while they speculate in the overvalued housing market, mortgage securitisation and related derivatives contracts, which Glass-Steagall would address by stopping banks from diverting credit into speculation, leaving credit available for productive businesses.

Click here for a free copy(ies) of the new CEC flyer which includes our submissions to the Senate Committee Inquiry on planned “bail-in” powers for APRA, and how they must be replaced with a Glass-Steagall separation of Australia’s banks.

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