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Australia's latest banking scandal is silly and suggests a widespread lack of skills in the financial sector.

BIScom Subsection: 
Author: 
Editorial Staff

On 19th April, Australia's newest national bank, Members' Equity Bank a.k.a. ME Bank, announced that it was to increase its interest rates on existing home loans, with effect from 19th April. Then it made a silly error. Given that the banking sector in Australia is under the most intense scrutiny and that it would be logical to assume that, if at any time, this is the time where banks will double, triple even quadruple check their actions, the stupidity of the error raises a serious question: is the financial sector in Australia simply under-skilled and, therefore, unfit for purpose?

ME Bank's capital raising in the open market is proving costly: now, instead of (notionally) paying its shareholders a return on investment, it is having to pay its competitors to use the money their depositors place with them (think about it - that's the essence of how it works). But - and here we have shades of stage two of the global financial crisis - banks are all involved in a money-go-round. The financial crisis reached the point of no return when that money-go-round dried up and there was a serious danger that the public at large would find out that there is, in fact, no money, only their own belief in the existence of money.

That in microcosm is where ME Bank found itself and, according to its CEO, Jamie McPhee, there are two reasons for the increase in interest rates and the first is the cost to the bank of borrowing money which is increasing due to increasing rates in the USA. Let's move on from that before anyone thinks too hard about it because that's a story that is so big that it needs its own article. In the context of this article, it's the other reason that causes concern: "industry reforms and increasing regulatory obligations are increasing our compliance costs."

What happened in the instant case was that the bank is required to give 20 days' notice of interest rate changes. Instead it gave two. The bank's response (which does not appear on its own media pages) is that, due to "a system error" the new rates were applied to payments taken on and after the 19th. That system error has to be human error and that's exactly the point this article seeks to make.

Australian financial institutions, as has been demonstrated by scandal after scandal, do not have a compliance culture that says "do nothing until we are sure it's right." There are insufficient checks and balances on so many processes that the entire industry is subject to question as to the basic competence of its workforce.

But here's the most important thing: it's not only the banks, etc. There are wrinkles in the fabric of Australian life that facilitate, to be nice, dodgy dealings by the few who want to take advantage of a generally trusting many. Across the whole commercial sector, there are aspects of day to day living that show a society in transition and, sad as it is to say, the trust and courtesy that most Australians demonstrate as their default setting, is widely exploited.

As for ME Bank, it has acted fast: the problem was identified on the 20th April, just one day after it arose. The bank immediately altered the process so that no further customers were affected. Arrangements were immediately put in hand to refund the estimated 2,500 borrowers the amounts they had been overcharged.

But fixing problems is not the same as making sure predictable problems don't happen in the first place. And if the bank is raising money for compliance, how come something as simple as the start date for new interest rates wasn't checked, or checked properly, by the compliance department?

Royal Commission or no, the bottom line is this: there is a mis-match between society as it is and society within financial institutions and so far there is insufficient work being done on flicking the switch as staff walk through the front door of their workplaces.

Further reading:
https://www.mebank.com.au/news...
http://www.afr.com/brand/chant...
http://catallaxyfiles.com/2016...

 


 

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