Finding a moral compass • THE AUSTRALIAN • NOVEMBER 25, 2014 12:00AM • Print

• Save for later John Durie

Senior Writer/Columnist Melbourne https://plus.google.com/103186074318763161422

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Illustration: Eric Lobbecke Source: Supplied

WHEN David Murray lodges his committee’s financial systems -inquiry report to Joe Hockey this week a key, and as yet barely -spoken element, will be on the -financial system’s culture or lack of it.

Last week, when ANZ disclosed it had put seven traders on gardening leave pending further inquiries, it underlined the ethical failings of the local banking culture which mirrors the failings so evident throughout the world.

The profile given to CBA’s -financial advice snafus is just another part of the same cultural abyss that seems to affect the banking industry and is a key element of the inquiry into the -financial system.

A recent study by Alain Cohn, Ernst Fehr and Michel Andre Marechal, published in Nature magazine, concluded there is something about the industry which drives dishonest behaviour.

It noted bank employees were intrinsically tied to the concept of money, and “that the professional identity condition rendered the concept of money salient”.

Earlier this month the US reached a settlement with six banks for a record $US4.3 billion ($5bn) in fines for rigging the foreign exchange market.

The Financial Times said this fine against some of the best known names in US banking, including UBS, Citibank, Bank of America, Merrill Lynch and JPMorgan, bought to $US56.5bn the fines levied by the Securities Exchange Commssion this year.

The obvious conclusion is that mere fines are not the answer.

The same names just keep appearing on the lists.

The actions were part of an international crackdown on behaviour in which, in the words of the University of NSW’s Justin O’Brien, “public trust in the market has been seriously damaged”.

A new book by O’Brien on the legend of former SEC chief James M. Landis, published by Harvard University, was launched last night by Judge Jed Rakoff.

Rakoff has criticised the enforceable undertakings favoured by regulators as being too lenient on the firms.

Britain has established a Fair and Effective Market review to be conducted by the Bank of England. Note the use of the word “effective” not “efficient”.

O’Brien says the logical conclusion is the creation of a public licence which banks must obtain and live up to.

The British review has noted “the policy problem is that fines and the haphazard application of criminal sanctions has proved insufficient to change conduct in a demonstrable and warranted way”.

Based on the evidence to date in Australia, that same conclusion can be drawn.

ANZ boss Mike Smith is the first to acknowledge he has had ASIC investigating the bank but it can be assumed ASIC has been looking at all the banks, and as ASIC boss Greg Medcraft has described cartel behaviour as the “elephant in the room” it can be assumed the other banks have crossed the line in some manner.

So far ANZ is the only one to acknowledge the bleeding obvious which also tells you something about the prevailing culture in the industry.

The Murray committee is likely to shy away from regulating culture but the concept of public trust is something to which the financial players can be held accountable.

European Union antitrust regulators are leading an international crackdown on alleged collusion in financial markets and, as noted last week, the ACCC is doing its bit on the issue but is not expected to complete its investigation until the new year.

Bank of England chief Mark Carney said recently that “there must be clear consequences including professional ostracism for failure to behave properly”.

The banking industry likes to paint the concept of regulation as if Australia is different, that it hasn’t suffered the carnage that has afflicted the industry elsewhere in the world and is somehow better.

That is how it is trying to frame the debate in the lead-up to the Murray release over the weekend.

The ANZ statement last week noting it had seven traders under investigation for much of the year together with ASIC investigations into potential market abuse put those arguments into context.

The foreign exchange and fixed interest and commodities markets are global and Australian traders were playing the same rules of the game as their international counterparts.

CBA chair David Turner, somewhat extraordinarily, said recently that the bank was trying to survive the global financial crisis which is why it missed on the -financial advice abuse which trashed customer accounts.

Somehow, that statement said it all and by now reality should be dawning on the local industry.

There is a cultural problem and the Murray committee will highlight this. Bank bosses can also no longer hide behind the “a few bad apples” line.

Britain’s FSA chief Lord Adair Turner has argued “bank executives face the challenge of setting clearly from the top a culture which tells people that there are things they shouldn’t do, even if they are legal, even if they are profitable and even if it is highly likely that the supervisor will never spot them’’.

St James Ethics Centre boss Simon Longstaff argues ethics were “set aside in favour of compliance”.

“If you have created compliance rules which mean no one has done anything wrong then people don’t learn how to do something the right way,” he added.

To be fair, some in the industry have woken up and, with Longstaff, some have created the banking and finance oath that pledges to do the right thing.

This importantly is done on an individual not institutional level.

The oath is administered by a panel that includes Carolyn Hewson, John Atkin, Simon McKeon and Helen Lynch and selects the board that includes the likes of AMP’s Stephen Dunne, Morgan Stanley Australia boss Steve Harker, First State’s Amanda McCluskey and ASFA’s Pauline Vamos.

The oath is based on trust, ethical restraint and speaking out when others have done the wrong thing.

Bank bosses have to accept some version of “inclusive capitalism” or face more intrusive regulation.

BHP reshuffles

BHP has an annual cost base of around $US32bn so the $US500m upgrade to its productivity gains is no small matter and brings the total to $US4bn.

Chief Andrew Mackenzie is positioning his future leadership.

Marketing guru Mike Henry moves to an operation role as head of coal in Brisbane while long-time operations man Dean Dalla Valle moves to head office for the marketing and technology brief.

Both are in the mix as next BHP boss as is new CFO Peter Beaven who will be replaced as copper boss by Daniel Malchuk.

Mackenzie also underlined a cautious expansion of Olympic Dam even though Escondido copper output in Chile will slow.