Australia is having a big conversation about trust. Traversing it is one of those parallel universe experiences. I mean - seriously? Is trust something chairpersons, chief executives and their cohorts are just discovering?
For those reading this from afar, trust has been brought into sharp focus by a Royal Commission into malpractice in the financial services sector. Did you notice the inherent bias in the title? By using the term ‘malpractice’ in the Commission’s title, there was automatic assumption built into its terms of reference by our federal politicians about the state of financial services in Australia.
Unfortunately, its inclusion in neither title or terms of the Commission is proving to be misplaced.
The revelations about the Australian banking and financial planning industries’ almost cavalier disregard for the interests of their clients have been cut and pasted into the Australia psyche by the brilliant executive interrogations by two young lawyers assisting the Commission, Rowena Orr QC (aka ‘shock and orr’) and Michael Hodge QC.
There’s the background, now here’s the shock - trust in your business is directly linked to your reputation and commercial success. At least it appears to be a shock to the nation’s top banking executives, who have led businesses that are now facing reparations of hundreds of millions of dollars to customers from whom they pillaged fees amounting to hundreds of millions of dollars in exchange for:
No service while they were alive;
No service after they died (yes, you did read it right); and
Advice given through affiliated advisory businesses with more regard for product sales and profits than the clients’ financial goals and circumstances.
Add to that allegations of worthless insurance policies sold to credit card clients who had no prospect of being eligible to claim, trailing commissions on mortgage sales through brokers and you have a veritable consumer bloodbath, which will have roll-on implications for the way the industry is regulated and governed for decades.
So how did all this happen?
Well, to be frank, we don’t know. Important conversations at board meetings have been omitted from the minutes. Only minor things, of course. Like rubber stamping executive bonuses worth millions of dollars, with some of those rewards attributable to sales and profits from some of the dubious practices listed previously.
It all makes El Chapo and the governance of his drug cartel look pretty mainstream.
With the much-watched needle on the Edelman Trust Barometer pointing ever-downward, you could be reasonably forgiven for assuming it was appropriately directing the world’s gaze down under. Corporate greed is being laid open for all to see by our Royal Commission.
That’s not to say, there’s aren’t some big winners out of this carnage. Australia’s superannuation (pension) system has a not-for-profit sector. Known in Australia as industry funds, these derive from an industrial wage trade off struck between the Hawke-Keating Labor Government, employers and the trade union movement in 1986. It was known as ‘The Accord’.
It was the foundation of mandatory contributions by employers on behalf of workers from 1993 which, in turn, created one of the most successful and envied retirement savings systems in the world. Virtually since inception, the mantra of these industry funds has been to keep fees low to leave more in the pockets of fund members. Like most price in lieu of value propositions, this is now having its challenges for super fund brands, but that’s a conversation for another article.
The industry funds’ investment returns after fees and tax have generally outperformed bank and other commercial superannuation funds for over a quarter century.
The outcome of the Royal Commission hearings and the consequent media coverage is already driving billions of dollars out of the commercial funds and into the major not-for-profits, but there’s worse to come.
The biggest movers of money in the system are corporate employers, who are obliged to choose a default fund into which to contribute their employees’ superannuation (9.5% of salary). Already one major employer, Australia Post, has indicated it will be moving its super from incumbent provider, AMP, but there will be plenty more. The second wave of financial cost for the commercial funds will be inflows from them into the not-for-profit sector of billions of dollars held in corporate superannuation schemes.
Through the lens of trust, it is clear why the not-for-profit model has been successful. With member representation on fund boards, its culture has been built around providing greater financial security in retirement for members. This is total alignment of purpose as defined by legislation and regulation (government), with the organisational purpose of the funds and the aspirations and definition of their purpose in the minds of their members.
There is no bigger financial deal than being entrusted to look after the life savings and security of customers or members and their families - and the public interrogation of the banking sector has resoundingly demonstrated failure to deliver on that lofty responsibility and the trust embedded within it. The staggering thing is that none of those in charge could ever get their head around the trust equation.
The mea culpas of directors, CEOs and executives in the sector are ringing real hollow. Their public coming out on how little they have comprehended the nature of their responsibility to customers is breathtaking, too late, futile and a sad cavalcade of B-grade acting. One wonders how they ever got hired in the first place.
Trust me, I don’t have the answer.
Photo: Courtesy of the Australian Financial Review. Rowena Orr QC at the Royal Commission.
Disclosure: I am an employee of not-for-profit super fund, Equipsuper. www.equipsuper.com.au