The Joe Walker Podcast - The Dogged Journalist Who (May Have) Pricked A Property Bubble - Adele Ferguson

Episode Date: August 9, 2019

Adele Ferguson is an award-winning investigative journalist best known for her work exposing misconduct and fraud in the...See omnystudio.com/listener for privacy information.

Hello there, ladies and gentlemen, boys and girls, swagmen and swagettes. I'm your host, Joe Walker, and this is the Jolly Swagman Podcast. Welcome back to the show. In this episode, our guest is award-winning investigative journalist Adele Ferguson. Adele is best known for a series of exposés in which he exposed fraud and misconduct in the Australian financial services and banking sectors. It all began with an article published on the 1st of June 2013, in which Adele revealed that the Commonwealth Bank of Australia, one of Australia's big four banks, had concealed financial improprieties by one of its top financial planets who controlled an estimated $300 million in investments. Thus began Adele's

series of exposés, including, perhaps most scandalously, the Common Shore incident, in which Common Shore, the Commonwealth Bank's life insurance arm, had been using outdated medical definitions to assess and reject trauma claims. Now, Adele's dogged efforts ultimately resulted in, on the 14th of December 2017, the announcement of a Royal Commission into misconduct in the banking, superannuation and financial services industry. In this conversation, we discuss banking scandals, particularly in relation to Australia's big four, CBA, NAB, Westpac and ANZ. We discuss the regulatory capture of Australia's regulators ASIC, which is Australia's version

of America's SEC, and APRA, which is Australia's macroprudential regulator. And we discuss one of the informal impacts of the Royal Commission, which has been the fall in house prices in Australia, because the Royal Commission caused the banks to tighten their underwriting standards, particularly in relation to their assessment of borrowers' expenses. Now, if you're not an Australian, this conversation may sound somewhat parochial, but consider listening anyway because A, Adele and I do take some time to define the more local terms, but also B, if in hindsight, the Royal Commission really was the event that finally pricked the Australian property bubble. Then Adele may well be remembered as one of the instrumental individuals in doing just that. And this will truly be one for the history books.

So without much further ado, please enjoy my conversation with Adele Ferguson. Adele Ferguson, thank you so much for joining me. My pleasure. Firstly, well done and congratulations both on the amazing work you've done in exposing bad practices at the banks, triggering the Royal Commission, but also your book, Banking Bad, which is released now? Yeah, it was released on Monday, August 5th. Fantastic.

So tell us how you got involved in this story. It was a phone call from Senator Wacker Williams, who in turn had received a phone call from a guy called Jeff Morris, who was a CBA whistleblower, who wanted to find a journalist to blow the whistle on forgery, fraud, cover-up by management. He tried a number of journalists, he tried a number of politicians and it got nowhere. And John immediately rang me.

I was ready to go off to China and Jeff sent me 1,000 pages of documents which I read on the trip and, yeah, I couldn't wait to get back to Australia to start the story. Wow. And that was 2013? That was 2013. So the story came out in June 2013. And it really was the most extraordinary thing. I'd never experienced anything in my journalistic career. It was page one.

It went on the website. And because people were clicking page one, it went on the website and because people were clicking on it immediately became the top story and there were hundreds of thousands of clicks for a business story and people commenting and then my emails went crazy. So I was getting hundreds and hundreds of emails, never ever saw anything like it before. And it was from other victims of the bank who couldn't believe that. It was really, in a sense, a Me Too type moment. They were saying, I'm actually a victim. I thought it was my fault. I'm stupid, et cetera, et cetera.

And this is what the bank had told me. And there were other whistleblowers inside Commonwealth Bank that were sending documents through about other forgeries and cover-ups. And so the story just kept on building and building and building. Tell me about Senator John Wacker-Williams. He was your partner in crime, in a sense, during this journey. He was, yeah. So he tipped me off to Jeff Morris. And when I was researching the story, because I'd written about a lot of banking

scandals on the back of that story a lot of more whistleblowers had come forward such as from National Australia Bank, IOOF, ANZ and then the big one which was Common Short the life insurance scandal with Dr Ben Coe and then when I when the Royal Commission came I decided to write a book. So I rang up Wacker Williams and said, I've just read a book by a guy called Paul Maclean who was a senator and he wanted a Royal Commission in the 80s because there was all this bad banking stuff going on with Swiss foreign currency loans which I'd never heard of and Wacker said to me, I'm actually a victim of Commonwealth Bank

and I really didn't know that. And he told me his story, which was after deregulation of the financial markets, the banks were just going crazy lending money to anyone and coming up with these exotic products. And one of them was Swiss currency loans. And John Wacker Williams was a farmer at the time. There was a drought on and he'd gone into the local Inverell Commonwealth Bank branch to get a $200,000 loan and he came out with a $640,000 Swiss currency loan

and the way they pitched it to him was interest rates at the time were 15% but if you took these exotic Swiss currency loans, it was like 6% or 7%. But the condition was you had to get a minimum loan was $500,000. They convinced him to get $640,000. Nothing could go wrong. It was just a cheap interest rate. Two weeks later, the currency changes and that loan is now $.5 million dollars so he was just absolutely beside himself and they he rings up to say what the hell do I do and they're telling him this farmer to start playing the money market so that's what he had to do trade currency he was trading a million dollars a day the shearer and he ended up losing his family and ended up in a $2,000 caravan. So

that was a way to tell the story about financial deregulation and nothing ever happened with the banks. They just say, we'll just litigate. We'll just threaten to sue them if they won't pay their loans because they can't pay. So it was all about lawyers and deep pockets and nothing ever happened. There were no consequences. So between 2013 and 2017, when the Royal Commission was announced, take us through that four year period. What was it like for you? What were some of the other stories you exposed? And what was some of the pressure that was brought to bear on you? So 2013 was the Commonwealth financial planning scandal. That triggered a Senate inquiry.

And during the Senate inquiry, you heard a lot of bad stuff about the regulator not doing its job. It had sat on its hands. So Geoff Morris had originally gone to the regulator regulator and it took 16 months before it acted. And when it did, it really didn't do very much. It tipped off the bank. It was going to come in and raid it two weeks later. So they got rid of a lot of stuff. And it had an enforceable undertaking, which was pretty weak. So the Senate inquiry decided after hearing all of this terrible stuff that there should be a royal commission into Commonwealth Bank and the regulator. So that was in June 2014. On the back of that I had I'd just done Four Corners because I thought it was such a

big story and it was really building. It needed to go onto television. So I did Four Corners and it was called Banking Bad and it had Geoff Morris, it had victims, it had the Senate inquiry and Wacker Williams. So that was a really turning point. We got the Senate inquiry and then other whistleblowers kept coming forward. Next was ANZ and Timber Corp,

which was a managed investment scheme. And that showed how ANZ had really bankrolled this terrible business. That was, you know, in parliament, it was called a Ponzi scheme. Thousands of people got burnt by it and are still suffering because of it, because they leveraged. And when the company went under, they still had to pay the loan. It wasn't just losing your money. You then had to pay interest. So it was really devastating for them. Then there was the Macquarie scandal where financial advisors were cheating on exams

and they were putting people into the wrong products. Then came National Australia Bank, which was similar to CommBank. It was forgery, fraud, cover-up, another whistleblower. And all of the banks had to put out compensation schemes to tens of thousands, hundreds of thousands of customers. And then the big one was in 2016, which was CommonShore. That was Dr. Ben Coe, who was the whistleblower. He was the chief medical officer at ComBank. He'd gone internally to the bank and said, this is what's going on in the life insurance division. There are policies which have got definitions in the medical definitions that are a decade out of date, such as heart attacks,

breast cancer, strokes, and people are getting knocked back. Legitimate claims are getting knocked back because the definitions are out of date. And there were terminally ill people who were getting knocked back because another thing was delay, deny, litigate. So it was a really cynical what was going on there and he just had to speak up. So I took that to four corners. That was called money for nothing. And that was another turning point that triggered the Labor Party to then call for a Royal Commission, but still the coalition refused to. So you're getting this real buildup of, you know, real big banking scandals. And some of the dirty tricks that went on behind the scenes

included smearing whistleblowers. So some of the worst examples was IOOF. It's a big financial services company. It's got about $170 billion in funds under management. So it's very big. It's got one of the biggest financial planning networks. Whistleblower came forward. Again, he was an internal whistleblower, tried to do the right thing, got terminated, so came to me, blew the whistle,

write the story about insider trading, front running, dodging performance figures, all sorts of terrible stuff. And I get a letter, an email from a very senior official at IOOF. And he says, he's not a whistleblower. He's a schizophrenic. He's tried to extort money out of us. And he's threatened, we have proof that he threatened some of his colleagues that he'd kidnap their kids if they didn't say what he wanted them to say, which is about as bad as you can get. I met with this official and I said, I'll bring you documents to prove all of this stuff that, you know, the insider trading, the front running, all this other terrible stuff that's gone on, if you bring me some proof. I met with him and I said, you know, schizophrenia is diagnosed. Have you got any doctor's certificates or anything that proves he is? No, he's just, you know, a bit mentally ill, I hear. So no, he didn't have anything. You say he tried to extort. Have you got any proof of that? No, it's just, you know,

what I've been told. And then I said, okay, you're saying that he's, you've seen emails where he's tried to threaten black male colleagues about kidnapping the kids. Where are they? No, it wasn't emails. It was just, again, I just heard that. So he didn't have anything. It was just a full-on smear campaign. And that's the sort of things that happen. Another case was James Kessel, who was a Common Shore victim who had a heart attack. And he was really poor. When I got a lot of documents from inside Common Shore, it had meetings that were held to talk about James Kessel's case and it had said, he is, you know, this definition is out of date,

we should at least give him an excretion payment. So when I found him in Weewar, he was living in a tin shed and I said, did you ever get an excretion payment? And he said, nah. They sent me a letter saying I didn't qualify. You know, my troponin levels weren't high enough. And he said, so I just thought, oh, well, I haven't got any money to fight them,

so, you know, goodbye. He didn't try to get money out of them because he didn't have the money to fight them. So he just went on his merry way. It was only when we came along and exposed the story. But what had happened was Wacker Williams had got a call just before the Four Corners had gone to air. And it was from a PR who's still there to say,

you know that James Kessel, he's a fraudster. He tried to fake his heart attack. His brother faked his heart attack and so did the sister-in-law. And so I got a call from Wacker in a panic because he was going on Four Corners to say, you know, have you checked this guy out? Apparently he's a fraudster. And I said, watch the show. We've got the cardiologist that brought him back to life.

It was no fake heart attack. He never went after the bank to get the money. He just gave up straight away when he got the letter and his brother actually had some problem with his heart and died so some fake heart attack and there was no sister-in-law and so John rings up this PR the next day and says oh some fake heart attack you know the brother died. He got brought back to life. He could hear them saying, is he still alive? You know, as they've got the defibrillator on him.

And he says, oh, well, it was an anonymous call. You know, why would you, if you haven't checked out your facts, why wouldn't you check out your facts before ringing up a politician? It's just pure smear. It's just pure smear. It was just shocking. You mentioned the delay, deny, litigate strategy in relation to the Common Shore scandal. Was that strategy explicitly dictated from the top

or was it more unspoken cultural thing? I think it was more an unspoken cultural thing because some of the claims were smaller than what the litigation was. You know, and if you want another example, there was a guy called Noel Stephens who was a scaffolder. And he got convinced by the Commonwealth Bank bank teller to swap his Westpac life insurance policy for a commonsure one. And he was told, you know, it's a much better policy, yada, yada, yada. And what happened was he ended up getting pancreatic cancer, terminally ill, put in a claim. And what happened was he got knocked back saying,

you've lied. You don't qualify for this because we've gone through your medical records and you said that you don't drink much. And according your medical records you do and according to credit card details there's a lot of drinking you know that you're buying from Dan Murphy's and other places which is pretty insidious really and so he got knocked back and he thought, I'm going to fight. So he had no money. He was living out the back in a caravan. He had $10,000 to his name, but he fought. For six months, he fought the bank while he was dying. I'll never forget. It was so horrific.

They ended up having to have the courtroom in his little tiny place because he was on morphine for the pain. He couldn't travel to Sydney to go to the court. He won the case and his claim was for like $300,000. He won the case. As the daughter is planning for the funeral, she gets a call from the lawyer to say ComBank is challenging it. They're going to appeal. So they appeal the case and they lose it again and they get the money but it would have cost ComBank hundreds of thousands of dollars one of the one of the lawyers told me it would have cost over 500 grand to fight a claim that

was just over 300 000 and they even took it all the way to an appeal for a dying man. While you were exposing this series of scandals and misconduct, what sort of pressure was brought to bear on you? Yeah, there was quite a bit of, there were smear campaigns that were going on with the Common Shore. Once the story came out, all the advertising got pulled, which was millions of dollars. From the paper you worked for? From the Sydney Morning Herald in the age.

They pulled it across all the papers, which was really terrible because at the time Fairfax had just made quite a lot of redundancies because the media is under so much pressure. So to lose so many millions of dollars was a really sickening feeling. But thankfully, the papers just kept on backing the story, which, you know, really, really lucky about that. And then, you know, I remember seeing there was a car parked out, a very suspicious car that parked out the front for a couple of days. And when we walked outside, it sped off, you know know that sort of thing who was fake adele yeah so what had happened was i someone had rang up pretending to be me and they obviously had access to documents to client files because I got a call from Morris Blackburn PR, the law firm who had some common

shore clients. And the PR said to me, do you know this woman? And I hadn't heard of the name. So I typed it into my Gmail just to see if maybe someone had contacted me. And I said, no, it doesn't come up. How come? And she and she said oh because we got a call from this woman today very distressed to say Adele from Four Corners has called her went through all of her details you know she had been a victim of domestic violence all this terrible stuff and had wanted her to come to Sydney and would pay for her air ticket her accommodation meals etc but wanted her to come to Sydney and would pay for her air ticket, her accommodation, meals, et cetera, but wanted her to meet another lawyer called Michael Bates, which was just complete fiction. But what was that about? I was obviously spruiking trying to poach clients for another

lawyer who happened to be on Four Corners. So yeah, it was a fake Adele. It didn't happen. And I rang up Michael Bates and he said, actually, funny you say that. There was a lawyer at Common Shore who I'm dealing with who'd said that Adele has been ringing up a claims manager at Common Shore trying to bully and intimidate to hand over documents. Otherwise, she's going to subpoena and do this and do that. And I said, can you do me a favor? Can you get that in writing? And when he emailed to get it in writing, he came back, oh, no, no, it was something different. You misheard me. This is a lawyer that took notes. So, yeah, it was pretty disgusting.

Tell us the story of how the Banking Royal Commission finally came about. And we have quite a few international listeners. So take us through the whole thing. Firstly, what is a Royal Commission? Yeah, so a Royal Commission is where you have a commissioner or you might have a few commissioners who have the power to compel documents. And you have to answer all the questions. You're under oath and you can be in contempt if you're caught lying.

So it's a very, very powerful thing for trying to get to the bottom of something. And in this case, it was a Royal Commission into Financial Misconduct and it went on for 12 months so for 12 months you had seven seven different two-week blocks of different topics that were that were looked into such as financial advice small business life insurance it's superannuation so it was really very went across the whole gamut. It was really fought against for many years. So as you recall, 2014, there's a Senate inquiry calling for a Royal Commission. Takes until the Labor Party, which is in opposition, until 2016 to back a Royal Commission. But the government is still fighting it as are the banks everybody the lobby groups

everyone's in force to make sure this royal commission doesn't come about how it ended up coming about was extraordinary it was the same sex marriage bill went through and it made some politicians in the national party not happy and, okay, so if they can actually pull a stunt like that, and get this bill through and blindside us, we've always secretly, in Wacker's case, he'd always wanted a Royal Commission, but there were other politicians who'd basically towed the party line and said, okay, we won't call for a Royal Commission. They'd sat quietly. Because their coalition partner, the Liberal Party, was broadly opposed to a Royal Commission. That's exactly right. So they always said, no, we don't need a Royal Commission, when in fact,

some of them did feel a bit uncomfortable because there'd been a lot of problems in rural areas with the banks. So they were getting a lot of constituents always complaining about the banks, but they stood firm with their coalition partners, the Liberal Party, to back that there should not be a Royal Commission. So when the same-sex marriage bill goes through, they say, okay, let's have a commission of inquiry into banking. Because you would always going to, you know, you've got the upper house and the lower house the upper house the senate was always wanting there were always the numbers because you had the labour party that wanted one you had the greens and you had some cross benches and you had wacker from the national party so you had enough people that would green light for a royal commission what was blocking it was the lot was the lower house they didn't have enough they needed one vote one person to cross the floor

and so pressure was put on Lou O'Brien who was a national party it was his first year in politics Wacker rang him up and said muscle up Lou to get this. You're going to cross the floor and we're going to get this. And it was triggered by the same-sex marriage bill. And so he did. He said, okay, I'm going to do it. And what happened was the banks thought, okay, if we get a commission of inquiry, which is just as powerful as a royal commission, the only difference is it reports to parliament, whereas a royal commission reports to the government. If we get this through, if this goes ahead and this Lou O'Brien crosses the floor and we've got a, you know, commission of inquiry into banking, they're setting the terms of reference. They're picking the commissioner. They wanted three. It's going to be two years and it's going to have a much bigger budget and who knows. So the banks put up the white flag, write to Malcolm Turnbull and say, please, will you hold a Royal Commission, basically take control. So that's what happened. Malcolm Turnbull and Scott Morrison front Canberra and say, we've decided to call a Royal Commission reluctantly.

So the banks realised that there was going to be one, one way or another. That's right. They wanted to get the one that was best for them. Yeah, that's right. So the one that they got was where the government picks the commissioner. It was going to be 12 months and they're setting the terms of reference, and it had a budget of $70 million. Now, traditionally, royal commissions go on for many years.

Yes, that's right. Was a 12-month royal commission an absolute outlier in that sense? Yeah, it was, actually. You know, the sexual abuse, institutional sexual abuse was five years. Even the Royal Commission into Unions was 18 months. To have such a massive sector, to have one year, and they included in the terms of reference superannuation, which was a good thing to include.

But when you're looking at it over a year and you're just allocating two weeks to a 2.8 trillion dollar industry which super is is absolute nuts tell us the story of sam dastyari persuading jackie lambie oh yeah so that was so if you wind back um in 2013 there's going to be a change to legislation. It's called Future of Financial Advice legislation. So it's a package of reforms to try and clean up financial advice, financial planning. You'd ban commissions on financial products but carve out life insurance so they'd still have commissions

and people would have financial advisors would now have to act in clients best interests which is pretty sad when you think you've got to legislate that the person you're going to get financial advice from has now by law got to give you acting your best interest you would think that would just be a given. But no, it was so not a given that they had to legislate it. So it was all this package of reforms to really bring financial advisors into line who had been shown over previous years to have conflicted commissions and not acting in clients' best interests. What happened was the government had wanted to really dilute that. So they came into

power and they wanted to dilute that legislation. So they're trying to wind it back. And what happened was Sam Dastyari, who's in Labor and he's now in opposition, and Nick Xenophon, who was an independent politician, they get together and say, we have to stop the wine back of FIFA. We really have to do this. So they think, okay, how are we going to do this? So Xenovan goes to Ricky Muir, who's a car motoring enthusiast, independent, and Jackie Lambie, who was part of the Palmer United Party. He flies to Tasmania and he's going around shopping with her in Kmart, telling her all about these terrible victims, what had happened to them.

And she agrees. She's across the line. She's going to vote in a pack with Dastyari and Xenophon and the Greens, such as Peter Wish-Wilson. Meanwhile, they start to get nervous the night before that the vote's going to happen so they take out Ricky Muir to dinner and Nick Xenophon and Sam Dastyari are at this restaurant with Ricky plying him with alcohol to make sure that they keep him you know keep him good so he'll vote the next day. And Matthias Korman, who is the Minister for Financial Services at the time, who's really the beachhead for winding back this legislation, he's getting a little bit nervous because

he's heard that this is what's going to happen the next day in Parliament, that the wine back is going to be obliterated and Fofa will remain. So he's trying to ring up Ricky Muir and the phone's going. Ricky's getting more drink poured down him and Sam turns his phone to the other side so he can't see Nick Xenophon and turns it on silent so Nick Xenophon, so Ricky Muir can't see that Cormann is trying to get through. And it happens. I remember Sam Dastyari's telling me in the book

that it was like reservoir dogs. They're all standing in a line, all of them, walking towards the press conference, making sure they've got Ricky because he's freaking out at this stage. I'll just stay in the room. I don't need to come. You're coming. It's a nice little anecdote because it's almost a harbinger

of how difficult it's going to be to get the Royal Commission up years later. Yeah, that's right. This was just for keeping financial advisors honest. That was really hard fought. They get the legislation through and then new government is elected and they're trying to wind it back. Tell me about the day you found out there would be a Royal Commission. Yeah, well, that was quite an incredible moment.

John Wacker-Williams had got a call from Andrew Thorburn, who was the CEO of NAB at the time, to tell him it's about to happen. And then he rang me and said, they're about to announce a Royal Commission. And a few minutes later, an email came through from the banks with the letter that they'd written to Malcolm Turnbull. And then Malcolm Turnbull's called a press conference and it's announced. So it just felt really great that Australians had been heard because they had wanted one. There'd been so many polls done and the majority of Australians really wanted a raw commission to just really clean up the sector.

One of the focuses of this podcast over the last couple of years has been the Australian housing market, both because I find it so interesting, but I think macroeconomically it's probably the most important issue facing our country in the medium term. And I did a seven-part series a few weeks ago, and many people regard the Royal Commission as being the straw that broke the camel's back, as being the second wave after the APRA tightening with the interest-only speed limit in early 2017, the Royal Commission being the second wave that tightened credit availability and may well be the thing

that finally pricked the Australian housing bubble. Yeah, sure. Did anyone sort of indicate to you at the time, you know, Adele, this is going to be a terrible idea, we don't want this Royal Commission because it could have this effect on the Australian housing market? Yeah, well, it was more in broader terms. It was the Treasurer, Scott Morrison, these were the reasons the Coalition were using, as well as the banks, that it would be terrible for the economy. They didn't pinpoint it to irresponsible lending or what would happen with the property market. It was more broader than that, but that was essentially what they were talking about. Your journalism didn't specifically cover the mortgage lending stuff so much, but what did you learn about mortgage lending practices through the Royal Commission? Well, it was really very similar to what had

gone in the wealth management division. There were bonuses and there were targets in order to, and so a lot of, a huge amount of irresponsible lending went on. So I had covered, I remember writing a piece and doing something for 730 on mortgage choice, which is one of the biggest, I think it's the second biggest mortgage broker in the country. Yeah, we had John Flavell, the former CEO on the podcast two years ago. Right. Yeah. And that gave me an insight into the sort of things that go on. So it's a franchise operator.

So it's all franchisees that run these businesses and the way it's done they get the commissions the bigger the loan they write the bigger you know the more money they make and they have these targets that they have to if they don't write a certain number of loans they get punished they get you know their trailing commissions get wound back, all these sorts of things, which people went on the record to say this causes a lot of fraud in mortgage broking. It's rampant in mortgage broking because people are pushed to the wall. And so they're saying you may need a $200,000 loan. They'll give you a $300,000 loan. So it really fueled a lot of people who couldn't afford loans were getting them because it was more lax than actually going straight to the bank.

You could more easily get a loan with mortgage broking. And if you look at the stats, which was surprising, more than 50% of home loans written in this country are by mortgage brokers. So it's a really, really big deal. And as you say, that whole incentive structure is weighted towards more and bigger loans because the commissions depend on that. Yeah, that's exactly right. So it's completely conflicted. They're not necessarily acting in your best interests.

And they're trying to come back and say, hey, why don't you take out a second? Why don't you think about negative gearing and take out a second loan or a third loan? So you had people that just couldn't afford one house having a portfolio of them. And that's what's been happening over the years. And it's not just even mortgage broking. The banks, particularly NAB, had introducer programs, which is just even mortgage broking. The banks, particularly NAB, had introducer programs which is similar to mortgage broking and in NAB's case they were getting gym instructors and various people who would get a kickback if they got their clients to take out mortgages with NAB. You know and again they're not acting in the best interests of the client, they don't know you know their circumstances etc and that's what came out in the Royal Commission was a lot of these

introducer programs and you know envelopes crossing over bank telecounters to to make sure that the the mortgage writer was approving loans that might not normally have been approved. Were these introducer programs official programs? Oh, yeah, absolutely. They're big. They're big. It was billions and billions of dollars. What kind of gyms did they have partnerships with, like Fitness First?

No, they didn't name the gyms. Right, okay. Yeah, they didn't name the gyms, but it would be gym instructors. Doing some squats and your personal trainer would be like, you thought about a home loan? It's incredible, isn't it? Wow. Yeah. So, and that was serious. Billions and billions and billions of dollars of home loans were through these introducer programs. NAB this year has cancelled introducer programs, but yeah, they were official. One of the big parts of this story is the role or lack thereof played by the regulators.

I want to ask you some questions about that. But first, can you just give us a history of the regulators in Australia? We have ASIC and we have APRA. Yeah. Where did they originate and what were their original purposes to be? Okay, so APRA really came out of the Reserve Bank. So the Reserve Bank originally was the prudential regulator as well as what it does now. And ASIC came out of a thing that was called the NCSC, which started out, it had in the 80s when financial deregulation happened,

this regulator had $5 million budget and 80 people, which was just ridiculous. When you think about 87, you had a stock market crash. You had banks almost going to the wall. Some of them did. And you had a regulator that had 80 people so you had bonds case you had a whole stack of these big entrepreneurs and you had this tiny little regulator so what happened was they then created a corporations act and called it the ASC the Australian Securities Commission and you still had the reserve Bank looking after prudential regulation but then a number of years later the Wallace Inquiry looked at the whole financial system and recommended a Twin Peaks so you'd have a separate standalone regulator called APRA

and you'd have ASIC which would include investments so you had two separate regulators and they were both light touch and collaborative in ASIC's case it was caveat emptor buyer beware and that's where some of the problems came with that was the actual structure of the corporate regulator yeah and you've seen over the years and through the Royal Commission that both of them have been really deficient. And just a few weeks ago, there was a big capability review into APRA, which was a recommendation of the Royal Commission. It had also been a recommendation of the Murray Inquiry,

which had come out with that David Murray did a big financial system inquiry a number of years ago, and he'd recommended a capability review into ASIC and APRA. One was done into ASIC, but APRA wasn't done. It was only done after the Royal Commission, and it was pretty damning, the recommendations. Graeme Samuel was the chair. They came out just a few weeks ago and it called for wholesale changes at the regulator because, again, it just hadn't been doing its job in some areas. In terms of financial stability, it's done a great job. But in terms of conduct and culture and allowing all these scandals to go on, it's really been missing in action.

I think it's really useful to talk about the theoretical context here. We have something known as regulatory capture theory, which is generally traced back to George Stigler, the Chicago Nobel Prize winning economist who wrote an article in 1971 called The Theory of Economic Regulation. And regulatory capture theory says that regulators often end up benefiting the regulated, the very people that they're supposed to regulate. And it's not because they're necessarily out and out corrupt.

In fact, it would probably be easier to solve the problem of regulatory capture if they were just purely corrupt. It's more insidious than that. And we can kind of distinguish three different ways that regulators become captured and start working for the benefit of those they're charged with regulating. One is that they depend on the regulator for information. And so they have to sort of bear that in mind and keep those relationships strong. Secondly, taxpayers have an incentive not to know what's going on. So, the only real audience is the regulated and the human capital of regulators is so industry

specific, your future job opportunities and earning capacity are sort of determined by keeping those doors open. So if you go too hard on the people you're supposed to be regulating, that might close off an opportunity down the track where you could go and work for them. So given that theory, what sort of examples did you see of that in ASIC and APRA? Oh, yeah. Well, many.

So the ones that really spring to mind are press releases. ASIC will put out press releases about breaches, misconduct with regulated entities. What we didn't know was they were sending draft press releases to them. Supposedly... To the big banks. Yes, supposedly for fact-checking. But in reality, it was much worse than that. The case of Common Shore, there's a press release that is,

I think it was December the 18th, 2016 or 2000. Yeah, it would have been 2016 or 17. I can't remember. But it was a December when everyone's gone away. So you've got to question why you put a press release out then. But if you go back to the draft press releases and emails that come out in the Royal Commission, they're actually saying, we're thinking of a community benefit. So what's happened is they have breached rules. And Commissioner Hayne in the Royal Commission is saying in his estimation it's

two million dollars a breach. So there were four breaches that they were looking at so that's eight million dollars and here's email saying should we you know give them a community benefit of say 250 or 300 thousand dollars and they're putting it to the bank what they think and then they're sending them a draft press release to make sure the wording is right. And it's getting diluted and wordsmithed. So Kenneth Haynes says, let me get this right. Is this the regulator asking the regulated basically for permission? Yeah, I think that really says it all.

It's just really quite chilling. And it was the same with APRA it was very similar what was going on they weren't asking the right questions so you had again it was sound like I'm picking on ComBank but all the banks have been bad in their own ways but again the other example that jumped out to me was 2016 towards the end of the year. You'd had fees for no services scandal. You'd had the Common Shore scandal. There were bank bill swap rates. And what we didn't know, but what they did know, was that there were three red flags for Austrac. So there was a lot of things going on, a lot of scandals plus previous scandals with

Commonwealth Bank. And APRA isn't asking them, what are you doing about? Because they had powers over remuneration. They could intervene. And they're not asking the bank what's happening with bonuses here. And at that stage, they actually, those executives all got their bonuses. The CEO got 108% bonus that year. And it was actually the shareholders that had a strike against them at the AGM. APRA had a meeting after that and didn't raise it because they thought, oh, well, the shareholders have already done that. You know, so it just shows you this, it's insipid, it's timid.

They should be calling the shots here and they're not. Do you think APRA was captured in relation to the bank's mortgage lending practices? Yeah, I think they were. I think when they came in hard to they were getting the reserve bank there was a lot of concern about the property bubble so you had a lot of stories coming out the reserve bank is warning about a property bubble APRA had to come in a bit hard on that and they did so they were getting a little bit panicky about that we could end up having some terrible because it had just all got out of hand irresponsible lending was really getting out of

hand ubs were writing reports called liar loans that the banks were disagreeing with but yeah it was a real issue yeah in jonathan mott's loans report, they estimated that there was something like $500 billion worth of liar loans, which was about a third. Yeah, which is really frightening. You know, the banks tried to downplay that or, you know, really disparage that report, but there are problems there. And so they're trying to really keep a lid on that because if that blows, we're in serious trouble.

The Royal Commission released the PWC Westpac data file in full. It had 400 and something files, people who had received mortgages. That was really interesting. I mean, it was glorious to have that data in full, but pretty scary if you actually go through... I can't say who shared this analysis with me, but if you run a few adjustments on the file, it implies a 75% savings rate,

you know, disposable income minus expenses relative to disposable income. And of course, the national savings rate is actually two to three percent. That's probably the most hair-raising thing I've seen in relation to the Australian housing market. Yeah, that sounds really scary. Yeah, I'll send it to you. I'll send you the analysis. The CEO and chair of the National Australia Bank, Andrew Thorburn and Ken Henry, fell on their swords as a result of the Royal Commission. Why did that happen and do you think it was fair? Yeah, you're right, they did. Ken Henry's still falling on his sword. He hasn't left yet. Andrew Thorburn has gone.

They didn't cover themselves in glory during the Royal Commission. So the seventh round was CEOs and a couple of chairs. So you had the chair of ComBank and the chair of NAB and the CEOs. Andrew Thorburn, they were asking him questions and they just didn't buy his sincerity. And sometimes they felt that he was dropping another executive into it, you know, putting blame on someone else and they were trying to steer it back to him. And, yeah, they just didn't buy that he was authentic.

So just park that for a second. And then Ken Henry comes on after him. And he comes across as he wants to answer his own questions. He appears to have a lot of hubris and is very arrogant. You know, at times he's mumbling under his breath. Rowena Orr is asking the question. He's saying, I'll answer the question the way I want to answer the question. And she's saying, Dr. Henry, answer the question. Is it yes or no? And he's saying, I'll answer it the way I want to answer

it. So things like that, Twitter went out of control at the hubris of this person. So when the final report comes out, Kenneth Hain is saying, you know, we've seen all these terrible things that happen, but he feels confident that Commonwealth Bank CEO has learned his lesson of the past. He's confident of Westpac, they've got a lot of work to do, but they seem to be heading in the right direction, et cetera, et cetera. But then he comes to NAB and he says, I don't feel confident that they have learned the lessons. And he said something like,

the public face of NAB is different from what's going on behind the scenes. And that got picked up. It was just a couple of paragraphs in a very big report. So then you had a lot of pressure on them to resign, you know, shareholders, the board, everybody was under pressure and they both resigned at the same time. But Ken Henry said he would wait until they found a new CEO. They found that CEO, but he's still there, so he's leaving towards the end of the year. There's an argument to say that they were scapegoated. I think we can distinguish between style and substance. Sure, at times Dr Henry Stile might have been arrogant, but arguably of the big four, NAB was the best of a bad lot in terms of its practices.

I wouldn't necessarily agree with that. You know, I had done, NAB has had issues for many years. They had the foreign currency scandal back in the early 2000s, and APRA had done a report into them saying that they bury the bad news. They had cultural problems, and they were going to fix it. They had risk problems. Fast forward to 2014, I had a whistleblower come to me. He was saying, it's a toxic culture inside NAB there were forgery fraud cover-ups very similar stuff but the other thing that the whistleblower gave was all these risk reports which showed that it was red and amber big problems and they were saying we're going to fix it so I get a whistle another whistleblower coming to me just after the commission has finished and I get a whole trove of documents including risk reports showing red and amber. Nothing had changed.

They're still talking about, yeah, we've got to fix these systems, we've got to fix these systems. The documents also included minutes of interviews with Ernst & Young, its auditor of 13 years, because they had to do a report for APRA. It's called the CPS 220 report on risk management frameworks. And that was really incredible. So the minutes are with 76 executives and the chairman, Ken Henry, and a couple of other directors. And in those minutes, which are confidential and are never to be seen the lighter day, the Royal Commission hasn't seen them, Ken Henry is saying,

I'm confident even now we are selling products which in the future will need remediating. So he's saying that in July 2018, during a Royal Commission, when a Royal Commission is raging, that's what he's saying, that they're still selling products now. Why don't you stop them? And he cites one of the products. Why would you not stop them there and then? Was that not evidence that he's taking action to resolve the issue? Well, I don't see the evidence. The questions I asked Nab last week were, what are the products?

Have you stopped selling them? How many customers have been remediated? They haven't seen the minutes and Ken Henry isn't speaking. Taking a step back, if we think about how we got here, there are two kind of ways of viewing it. And the first is the financial liberalisation, deregulation and then privatisation of the banks was they deregulated the financial system. So Paul Keating was the treasurer and he felt that if you were deregulating the system, so we're now plugged into the global economy, he allowed 16 foreign banks to come in. So he gave licences to 16 banks because he wanted to create more competition. Paul Keating felt that Commonwealth Bank couldn't compete if it was, you know, government owned bank. So he felt that it needed to be privatized so that it could have the capital. And that's why

it was floated. And he was, you know, he was right. The shares have gone from,4 odd to $80 odd. So people have made a hell of a lot of money out of Commonwealth Bank. Part of what happened in the banking system was when you got deregulation, the banks start to open themselves up to different types of products and cross-selling. And they move into, they want to get bigger. The share market is a measurement of bonuses. So they want to keep the share price up. They want to grow. They're not allowed to merge. The big four banks aren't allowed to merge because you've got the four pillars.

So they think, where do we start? How do we get bigger? How do we get economies of scale? They wanted to tap into super because at the same time as deregulation you also a few years later you got compulsory super so you're getting billions of dollars flowing into this big retirement savings so the banks want to get in on the action so they start buying up wealth management businesses commonwealth Bank buys Colonial, NAB buys MLC, Westpac buys BT, etc, etc. So they've now got these wealth management businesses, which have got commissions. So this is where a lot of the conflicts come in. And they import a sales system called Co-Ont Brown, which is an aggressive sales system, and it's all about upselling and that's what they do.

So you're a bank teller. Previously you're just putting deposits into banks, referring home loans. It's a pretty bland, non-stressful job. Suddenly your whole world changed and you're not called a bank teller anymore. You've got to start referring referrals and you're getting bonuses and targets. And so it all changes.

It becomes a lot more aggressive. But the Royal Commission looked at even more boiler room cultures than that. There was one company called Freedom Insurance, which was direct insurance selling. And some of the things that went on there were just extraordinary where they would have, you know, upsell. If you sell X number of funeral insurance policies in the next hour, you'll, you know, get a $100 gift voucher. If you do this, that, the other, you'll get a trip to Bali,

a cruise around the Gold Coast, various things like that. The Cohen-Brown method you mentioned, didn't that have like bad music that would start playing if you got the wrong answer? Yeah, that's right. Wow. So playing in the ear of the salesperson. Yeah.

Wow. So, yeah, it was really interesting times. Wow. So, the other contextual view of how we arrived at this situation where we have all this financial misconduct is that there's so much demand for these banking services. Charles Kindleberger once wrote that fraud and swindling are demand determined, at least as far as mortgage lending is concerned. We have such a frothy industry, so many people wanting mortgages. And at the margins is when fraudsters start to kind of come out of the woodwork. Did you form a view on that? I guess one way of summarising this view would be, you know, we've met the enemy and the enemy is us.

Yeah, well, there's definitely been fraud going on, not just in mortgaging but in, you know, right across the gamut. But, I mean, it's only possible in a broader milieu of people really wanting these products. Yeah, but sometimes people don't know what they're buying. And I think that's what happened with the banks. People are going... It's like you go to a financial advisor. I sort of liken it to going to a doctor.

You go to a doctor because you don't know what's wrong with you and you want them... They're the expert. You want them to tell you what's wrong with you and this is the medication you need and you'll loyally take it. You go to a financial advisor thinking I don't know about my finances, that's not my expertise, please tell me what it is and if someone says you know Timber Corp is this great product, it really safe it's got an x percent return and you're going to get this tax back and these are the documents if you want to read them but you know i know this product

like the back of my hand you know because some people were accountants that were flogging these and they've been to their accountants for years and then they suddenly start selling these products you think why would you doubt what they're saying? You think it's, you know, yeah, maybe it's too good to be true, but you believe it. In February, the Royal Commission delivered its final report. What has happened since in terms of implementing and taking up the recommendations? It's been pretty slow. The government has

introduced two bits of draft legislation. One is for grandfathered commissions, so that's the trailing commissions on financial products that will be banned, I think, by 2020 or 2021. I think it's 2020. Yeah, I think it's 2020. But there's still a long way to go. The banks have been trying to, you know, clean up their act, introducing compensation schemes. They're working with ASIC because of the fees for no service. The banks are constantly putting out statements up, revising how much compensation they need to pay out. I guess you could say the most impactful thing that has come out of the Royal Commission so far

has been how the banks assess people's expenses when people are applying for mortgages. Yeah. So they were using the HEM, the Household Expenditure Measure, which assumes a median for basic expenses, the 25th percentile for discretionary expenses, and no expenditure on luxury items. So a very modest way of assessing.

It was a very controversial measurement. It wasn't banned by the – it wasn't a recommendation to ban it. Yeah. But the banks have started to curb it in probably not just because of the royal commission but because i think there's quite a bit of nervousness about this way before the royal commission even happened there was nervousness about this property bubble but the royal commission certainly turned a spotlight onto it it certainly did absolutely have you thought about the fact that you had an

instrumental role in bringing about the Royal Commission and the Royal Commission has tightened credit availability which has exacerbated the downward trend in house prices. Have you thought about the fact that you might be the person who finally pricked the Australian housing bubble? No, I haven't at all, because I think what are we meant to do? Are we meant to just let it all keep going on? Because at some stage, the music would stop. Trees don't grow to the sky. No, they don't. At some stage, things fall apart. Maybe this was just a punctuation mark to put it under control a bit. Before it got even crazier? Absolutely.

And it was getting really crazy. As I said, a few years ago, the Reserve Bank was coming out warning about self-managed super funds, too highly leveraged, slow it down, trying to, you know, rein in the banks on doing all of this stuff just to try and put a curb on this property bubble. Well, Adele, thank you so much for your time. Speaking with you and reading both your articles and your new book has really reminded me how honourable and important investigative journalism is. So thanks for all you do. Thanks very much.

Thanks so much for listening. I hope you enjoyed that conversation as much as I did. For links and show notes to everything discussed, you can find those on my website, josephnoelwalker.com. That's my full name. I'm also on Twitter. You can find me there. Thank you for your time.

Thank you for listening. Until next time. Ciao.