The Royal Commission into the Australian banking system has triggered shocking headlines of abuse, particularly around financial advice. But there is a danger that while the inquiry identifies issues and delivers a regulatory response, it doesn’t get to the core of the problem.

It is my view that the core of the problem lies in the sad decline of a culture of service in financial services, and its replacement with a culture of profit and greed. It is a decline that started with the widespread demutualisation of many of Australia's great service entities.


A problem in the making

The problems highlighted by the Royal Commission have been building for a long time. Australia embarked on a demutualisation and corporate conversion of the financial services sector around 25 years ago. State banks and the Commonwealth Bank were privatised and the co-operative regional banks like Advance and St George, with mutuals like AMP, NRMA and National Mutual were demutualised.

The argument at the time, led by international investment bank advisors and other commissioned paid experts (sound familiar?), was that demutualisation would release embedded value which was "somehow" owned by current members. The contributions of the past and the rights of future members were forgotten, ignored or taken away. The advisors claimed that company structures would create better businesses because they would be profit-focused and would attract better talent through employee profit incentives. They claimed that market place rigours would benefit owners, clients and employees alike. How wrong they were! … but they were very well rewarded for their advice.

As we’ve seen at the Royal Commission, all those arguments have fallen by the wayside - except maybe for employee benefits. There is immense evidence that businesses driven by the profit motive over service motive can destroy themselves.

High salaries and stock incentivised bonuses will not produce better managers today than there were in the past. Instead, we end up with short-term focused management. The Royal Commission has exposed a plethora of senior financial services management that show little interest in sustaining in perpetuity the businesses they are privileged to work for.

The AMP is the best example (or is it the worst example?) of an enterprise that since demutualisation has self-destructed or devalued the power and value of its brand. AMP was formed in 1849 as the Australian Mutual Provident Society, a non-profit life insurance company and mutual society. Now, a national icon is no more, its image seriously tarnished.

The AMP’s problems evolved when it was demutualised. That decision turned the organisation from a service orientated “not-for-profit” well regarded across Australia into a profit-focused enterprise. Over time, the incentives have become more employee focused, well away from the AMP’s heritage of customer focus.


Rotting from the head

The Royal Commission is uncovering the consequences of a profit focused financial services enterprise. But the profit focus is demanded by Australia’s shareholders or investor base - either directly or through pooled investment funds. The need to seek wealth creation is the focus of retirement savers and that is mandated in Australia. However, it requires more than higher profit numbers to create sustainable value and that is the unsavoury lesson being learnt by many public company boards.

Another observation is that many of the leaders of major financial companies were not brought through the business. Very few have any experience in a member or customer focused mutual. Many have resumes that proudly proclaim business school, accounting and legal training but are silent on customer service or ethical business training.

There are too many financial services management teams and boards dominated by people who have no heritage in the businesses or industries they manage or oversee. The consequences are clear – they simply haven’t ensured either valuable or quality services for their customers and they haven’t protected the brand value of their businesses.

At the same time, shareholders have disengaged. The power of shareholders to make change has been stymied by the power of major super fund investors and large offshore index investors. The major institutions being exposed by the Royal Commission are significantly owned by many of their direct competitors which oversee pooled funds management operations. That also leads to an unsavoury outcome: some fund managers may benefit from wounded competitors. They will only seek change when public disquiet – like now – becomes over-bearing. So, the AMP board will finally be held to account by the Industry funds - but it has taken far too long.

Today, companies are more likely to be sued in class actions for misdemeanours than directed by active shareholders to change. That is an unfortunate outcome of poor governance and poor boards. Class actions benefit the legal fraternity more than disaffected investors and the costs are rising across the community at large. There will be a flood of class actions arising from this Royal Commission and that is a very poor outcome.

Away from the legal claims, there is the ethical consequence of excessive payments granted to the management of financial institutions. Excessive executive pay adds to a culture of greed and envy inside those institutions. The Royal Commission may have exposed this consequence, but not its cause.

Lower and middle management look up and see their CEO and (increasingly) Chairman being paid extraordinary amounts of money. Senior executive management are commonly being paid millions of dollars of base salary with the potential to double that with no consequence for destroying value or a brand. A bank CEO can work for five years and make a $25 million turn. A bank chairman is now being paid many hundreds of thousands of dollars annually, ridiculous amounts of money that are not based on performance.

The problem with remuneration of this type is that it doesn't reward risk or penalise poor management. The business leaders are the custodians of major institutions. They did not build them. Their remuneration should reflect this fact.

The culture of these institutions is driven from the top. It doesn’t start at the bottom and flow up. People are led by example. The focus on short-term gain, on profit, on share price, on a five-year contract, maximising the wealth of the management team creates poor outcomes. Is there really any wonder that staff operate with greed and envy if that is exactly what their senior executives present?


Reflex response

Despite ingrained cultural problems, what we’re likely to see in response to the Royal Commission is a knee-jerk reaction on top of much needed change. The first is greater regulation (akin to a "tighter band aid"). Another will be the enforcement of stronger “internal audit” regimes inside advisory businesses and these are well overdue.

Many advisory firms inside banks will be sold off as senior management and boards panic under the hot glare of public scrutiny. It will be unfortunate if the people that mismanaged these businesses should manage their sale or benefit (a bonus entitlement) from the sale.

By selling out of "wealth advice", the banks and other institutions are effectively saying that it is not possible to ethically manage a wealth advisory and wealth product business. Society should question why ethical behaviour should be such a hard undertaking; why will unethical behaviour inside an institution improve if it is not directly addressed?

If the institutions being examined by the Royal Commission were mutuals and focused on client services, would we have the cultural and ethical problems that are now presented? The mutual of the late 1980s and early 1990s had few problems in offering client’s multiple financial services, from deposit taking to lending, mortgages, personal finance, into wealth management, advice and insurance products.

The mutual culture has been destroyed by greed. Culture is very hard to build but so easy to lose. Indeed, very few public companies have built or sustained an enduring ethical culture. Across the world, many major companies are being exposed with significant ethical shortcomings.


Who will provide advice?

Today our major banks are declaring that it’s easier to sell off financial advisory businesses than to fix their culture. We predict that in a decade’s time they will be buying those businesses back because high quality financial services do sit well inside a strong and ethical financial institution. People are naturally attracted to strong and enduring service providers.

Rather than the difficult but rewarding endeavour for management to deal with the cancer sitting inside their companies they will take the easy road - cut out the cancer and throw it away. But in doing so, they will neither acknowledge nor take responsibility for the capital lost on a false business premise, simply described as the pushing of product and services via commissions and customer lock-up arrangements.

Shareholders and indeed society should be pressing these entities to fix the problems. They are household trusted brands, and many were built over decades with public trust in their services. The problem with the jettisoning of financial advice by institutions is that it disregards the massive issue facing Australians: their need for financial advice. If our largest 4-5 institutions leave the advice industry, who will fill the void, and can it be properly regulated?

Australia has $3.5 trillion of declared investable assets - $2.4 trillion housed in super and $1 trillion in household investments outside the residence. Overwhelmingly, the beneficiaries of those funds have little financial nous.

Financial, superannuation and tax laws are highly complex, as are estate planning laws and the ongoing management of investment portfolios. For instance, if Labor’s proposed changes to franking credits become law, where will the average person go to seek advice?

Financial advice is as important as legal or medical advice. On a personal level, I recall that when my father, suffering from advanced dementia, needed to move into high-care management, high level financial advice was needed. The financial arrangements were so complex that even an industry “insider” needed planning by a specialist. Our family drew comfort in seeking help from a specialist working for a creditable major institution.

It will be interesting to see if independent financial advisors can fill the void created by the withdrawing of the majors and the increasing demands of an ageing population.


A difficult conversation

The management and boards of major institutions need to behave like custodians, not only of shareholders, but of employees and customers as well.  Great institutions will trade in perpetuity – the banks and insurance companies have been around for decades and some for a hundred years. Westpac was founded in 1817.

This Royal Commission is a wake-up call to Australia. It has uncovered poor and unethical behaviour. However, it won’t investigate the reasons, some of which can be directly traced back to demutualisation.

But can we go back to mutualisation? Probably not.

Therefore, we need to understand the consequences of what our society has created. We also need to have a very direct conversation with our business leaders and tell them that there is more to being a good CEO than driving the business solely for profit.

Being a CEO is also about ensuring that a business is perpetual; that there is life after the leader goes. It is an ethical backbone that creates a sustainable and profitable business, operating within a community, a society. Excessive remuneration and bonuses must be reviewed; that action alone will create a framework for better business ethics and corporate culture. Leadership is critically important for the institutions currently being exposed by the Royal Commission.

Across the country, away from the financial services sector, the Business Council of Australia needs to better entrench ethical standards. Society demands a lot from our politicians ethically, we need to have the same demands upon business leaders.

This is a difficult conversation, but it is worth having. Those managers and business leaders not up for the conversation and the necessary consequences need to be moved on – urgently. Those that stay for the journey need to be rewarded by acknowledgement rather than simply dollars.

Chris Gilbert

Your article goes to the core of the problem. This is a deep cultural issue. It also shows itself in many other parts of our society, not just financial. Our political sysem is riven with self interest. Greed is God, and unchecked, leads to corruption. Profit can be an aspect of greed. Turnbull and Morrison's budget cuts back on ASIC funding at the very time when it should be increased. That says alot doesn't it? The answer in this society is to have powerful checks with substantial penalties that are exercised. ASIC failed and its past leaders should be publically brought to account. However a strong case can be made that the Governments of the day were also complicit in agreeing with how ASIC became a "Hollow' organisation. This Government is lead by 'Hollow' men. Thank you for this much needed article

Charles Thurgood

Well and thoughtfully written but establishing shareholder "lobby" groups to overcome or negate the influence of large super and index funds could well prove to be a daunting task.

Paul Ujj

'By selling out of "wealth advice", the banks and other institutions are effectively saying that it is not possible to ethically manage a wealth advisory and wealth product business.' Perhaps the message is: wealth management is not as profitable as other financial services, if managed ethically.

Colin Disseldorp

Were the mutual organisations any better selling life insurance back in the 70's?

Jeffrey Gehrke

IMO the reduction of customer service in favour of sales, sales sales, commenced with the introduction of Cowen Brown sales process to banks about 25 years ago.

alan king

Could not agree more. Also,how distasteful is short selling and super funds lending their shares.

Damien Parker

An elephant and a Koala stamp on that insightful article. Hopefully the recommendations from this RC will be broad and deep...and we have a government with the cahoonas to implement. As an investor, the race is now on to assess the potential winners from this spill. I'm tipping the majors will thow the baby out with the bathwater. Got to work out where to position myself to catch said baby! Any thoughts anyone? IMF is a special.

Hear! hear! This has needed to be said years ago. Us little people have thought and said this but could see no way to make a difference. There are other industries that could be likened to the overpayments for services, e.g. legal system, real estate etc.

Douglas Schorr

Great article. I have, and write about, the same concerns. "Being a CEO is also about ensuring that a business is perpetual; that there is life after the leader goes" I prefer to turn on its head ... there must be life after for the borrower. I am an Ellen Brown fan Thanks Mr Abernethy Douglas Schorr

Andrew Varlamos

Excellent article that highlights executives and boards are custodians of institutions they did not themselves build.

David Johnston

Part of the problem is that as soon as there is a problem, top level management resign. Why can't they stick around to fix the problem with the business culture? I would have thought that would be the responsible thing to do. Or do they always have to recruit people with a conscience, assuming they even exist in the financial sector?


this is not only in Australia, but unethical behavior started in the USA, where top executives are grossly overpaid, where remuneration committees are stacked with other corporate chieftains who sit on each other's boards. This is the unacceptable face of unbridled capitalism

Richard Holland

Yes, couldn't agree more with your article. At a superficial level, the issue is the prevailing culture in an organisation, whether it be a for profit organisation or not. Culture is driven from the top, whether it be an organisation,government or indeed a family. Often,ethics,morals & behaviour are driven by greed for power & money & of course, there are plenty of opportunities in our society today to exploit others & 'feather our own nest'. The real core of the issue, is the deterioration of our values across society in general This has been happening for many years. My question is, how do you address this issue? I think part of the answer lies in the need for families,schools & universities to give this the attention it clearly requires, in terms of what are acceptable morals & ethics & our regard for others in our society. In addition, professional bodies such as the accounting,legal & directors fraternities need to deal with this up front & centre. Then of course, we have bodies such as ASIC & APRA. Whether they have been sufficiently effective is another matter. Richard Holand

Harley Grosser

Good point on the reduction in supply of quality advice when demand is increasing. There is more at play here too, with new education standards professionalising the industry, but that will kick off a big reduction in adviser numbers. On balance, the quality of advice will increase. The fire sale of bank-owned advice businesses post RC is not a bad thing though, they are good businesses when well run, not just for the sake of distribution. There will be big opportunities coming out of the RC for investors keeping their eyes open.

David Yabsley

Everything you have written also applies to Co-Operatives that have converted to Listed Corporations. Corporatisation of Mutuals & Co-Ops has been the most consistent wealth destroyer in Australian Economic History.

William Jones

This has been brewing since the mid nineties; then I left Colonial (17 mistakes in two years, only two of which were in my favour) and started a SMSF. Those of us who did this have been so successful that we are now targeted by the rogues we left behind, with the assistance of politicians and Treasury, from their safe haven of taxpayer funded indexed pensions. They are missing the $14 billion pa in fees that we no longer pay.......

Murray Goulburn was killed pretty quick by greed & incompetence.A smart parasite never kills it's host but this Royal Commission has shown management has sucked a bit too much blood.Our modern medicine has cleaned out most human parasites only to increase auto immune diseases.So we still need a few minor parasites.

Trevor Forshaw

Great article. Demutualisation being the catalyst for what we have at the moment I don't think so. AMP and National Mutual in the 1980 s used to market products such as simple super where they would take out up to 50% of the first two years contributions as establishment fees. As one other contributor noted the life and endowment policies of the 1970 s were no better. Wealth advice has been a ticket clippers paradise for decades. Hopefully the RC will put an end to this. Higher education standards , ethical professionalism, and understanding that running a sustainable long term business understands that serving the customer first is the main game. Do this well and the remuneration will flow.


Excellent article and I couldn't agree more. Feathering of nests must cease. The Royal Commission was long overdue - and I can think of several other institutions (including the health industry) that should be put through the same rigour.