The Commonwealth Bank’s response to the Senate investigation of ASIC blames incompetence and individuals for the scandals at Commonwealth Financial Planning Limited. Chief executive Ian Narev: “Poor advice provided by some of our advisers between 2003 to 2012 caused financial loss and distress and I am truly sorry for that.”
This is the predictable ‘rotten apple’ defence to allegations of impropriety. And it is simply absurd to describe some of the alleged actions of those advisers noted by the Senate Report -- such as “forgery and dishonest concealment of material facts” (Senate Inquiry Executive Summary, p. xviii) -- as merely “poor advice”. If the bank can describe that as “poor advice”, then a bank robber would be entitled to describe his profession as “making withdrawals”.
This is also not the only allegation of impropriety hanging over the Commonwealth Bank: the other is the as yet unproven allegations about its behaviour with regard to Bankwest, which the Commonwealth Bank took over from HBOS (Halifax Bank of Scotland) in 2008. About 400 customers of Bankwest have alleged that they were forced to default on their loans, even though they were paying their loan installments in full and on time (see also Evan Jones’ detailed articles on this issue).
Bankwest and the Commonwealth Bank deny these allegations, but they have been repeated in at least one of the submissions to the Senate committee. This submission was written by the same anonymous source who briefed WA Liberal Senator Alan Eggleston for the speech he gave about Bankwest under parliamentary privilege in the Senate on March 24.
The purchase of Bankwest by the Commonwealth Bank was a by-product of the financial crisis. In 2008, Bankwest was a subsidiary of HBOS, and HBOS was one of many British institutions that appeared likely to follow Northern Rock into bankruptcy. Fearing a British ‘financial meltdown’ after the collapse of Lehman Brothers in the US, the British government brokered a takeover of HBOS by Lloyds, and injected over $60 billion of public money into Lloyds, HBOS and the Royal Bank of Scotland. HBOS then sought to offload its Australian subsidiary Bankwest, and the Commonwealth Bank purchased both Bankwest and the insurance company St Andrews Insurance from HBOS for $2.1bn.
This set the scene for allegations of impropriety against the Commonwealth Bank. As Senator Eggleston noted, since the Commonwealth paid $2.1bn for Bankwest and St Andrews combined, the actual purchase price for Bankwest was slightly less than $2.1bn. His source “advanced the view that CBA paid $63 million for St Andrews, which means that the actual payment for Bankwest was $2.037bn.” (All unattributed quotes from this point on are from Senator Eggleston’s speech.)
The Commonwealth Bank Annual Report valued Bankwest alone at $3.676bn at its purchase date of December 19, 2008. Senator Eggleston noted that:
If we subtract the actual amount paid by Commonwealth Bank from the actual value of Bankwest we get an apparent discount of $1.639bn. The question then arises as to why the Commonwealth Bank received such a price discount …
Senator Eggleston then noted that Bankwest’s annual report for 2008 included an allowance for “Gross Loans and Advances to Customers -- Impaired, showing a total value of $1.639bn”. Senator Eggleston continued that $1.639bn:
… was the figure that was mentioned as the discount given for the bank. It would seem a reasonable inference that this $1.639bn is not a coincidence. If it is true that the CBA got a price reduction exactly equal to the gross value of impaired loans in 2008 then this means CBA paid zero cents in the dollar for those impaired loans. This was clearly a massively significant motive to impair loans knowing that the losses would be passed onto British taxpayers through the British government's bailout of Bankwest's distressed parent company HBOS.
Senator Eggleston also alleged that Commonwealth Bank had a second incentive to impair loans, since the elimination of commercial loans from its portfolio also reduced its risk-weighted assets. This in turn improved its capital adequacy ratio (defined as “capital divided by risk-weighted assets”), which plays a large role in determining the bank’s funding costs and hence its profitability. The bank also needed a higher capital adequacy ratio since it “was also applying for a US Federal Reserve holding status, both of which require a greater capital burden”. Senator Eggleston observed that:
If a bank is engaging in a strategy which requires a greater capital requirement during a time where capital markets are turbulent then the only option left to them is to reduce risk-weighted assets. A court could conclude the CBA had a predetermined outcome it needed to achieve and it opportunistically capitalised on Bankwest's dire financial situation by manufacturing defaults on certain customers to engineer the result that it wanted.
As bad as the Commonwealth Financial Planning Limited scandal has been for the Commonwealth Bank, these allegations about Bankwest have the potential to be far worse. Senator Eggleston has already alluded to the incentives the bank faced for the actions alleged by those Bankwest customers. Submission No. 422 to the Senate committee goes one further, to state that criminal charges could well be laid:
If evidence is produced showing that this conduct was intentional and premeditated then this existence of mens rea gives rise for possible contravention of the following criminal breaches of law:
· Corporations Act s 184 ¡V Good Faith, use of position (criminal offense)
· Criminal Code s 192D ¡V Fraud, obtaining financial advantage or causing financial disadvantage (Submission 422, Senate inquiry)
The submission also argues that there are potential criminal issues for ASIC:
It is an offense under the Crimes Act section 316 for anyone to intentionally conceal an indictable offense. I am aware that ASIC has been aware of these allegations for some time now and has continued to state to victims that ASIC will “take no further action” on the matter.
These allegations may be disproven in a court of law -- if they ever get to one. But the very fact that they exist at the same time as the CFPL scandal implies that there is more going wrong in the Commonwealth Bank than simply the occasional piece of “poor advice”. A Royal Commission into the Commonwealth Bank is required.
The Abbott government is doing itself no favours by resisting this call from the Senate committee. After all, the alleged victims of Bankwest were small business owners -- the prime electoral base for the Liberal Party. The longer the Liberals spend belittling the importance of these allegations, the more this electoral base is likely to conclude that their interests are better served by voting Labor.