Community Obligations of the Finance Sector

A Legislative Framework

Finance Sector Union of Australia - June 2004

Summary

The FSU believes that the Australian finance industry stands at the crossroads. Decisions must be taken by politicians, corporations, stakeholders and the Australian community about the next path ? further concentration of power and disregard for community responsibility or a regulated, partnership approach for a sustainable future.

The Finance Sector Union, representing more than 60,000 employees across the industry, calls upon the federal government to act to compel the industry through legislation to meet its social obligations.

The rhetorical recognition of corporate responsibilities and of stakeholders other than shareholders is no substitute for the role of government in ensuring companies in this sector, who provide an essential service and enjoy a privileged market position, are compelled by law to meet their obligations.

The industry requires legislation that enshrines obligations to all stakeholders, not simply the vested interests of shareholders alone. Such legislative requirements would compel the industry to act in a socially responsible manner with regard to their employees, customers, shareholders and the community in which they operate. Such regulation poses no threat to those companies that have or are prepared to adopt recognised corporate social responsibility measures and reporting processes.

Legislative changes needed for a better finance industry

The behavioural history of the finance sector demands government intervention to compel companies to comply with the social obligations that are intrinsically linked with being licensed to provide an essential service to the community.

The Finance Sector Union wants to the Australian finance industry to be a professional and accountable industry, comprised of a range of diverse companies employing hundreds of thousands of Australian workers, focussed on providing excellence in product development, marketing and customer service.

To achieve the vision articulated above the Finance Sector Union calls for the following consultative and legislative reforms to be enacted by the federal government.

1. Establish and empower a Financial Services Advisory Board comprised of industry stakeholders, specifically company representatives, union representatives, consumer representatives and community representatives, to assist the government in the implementation of the following legislation and to advise on industry developments.
2. To maintain a diverse and competitive industry by enshrining the ?four pillars? policy in legislation and requiring a Public Interest Impact Assessment before allowing any mergers or acquisitions of Australian banks or insurance companies.
3. To ensure the provision of universal and equal access to trusted and secure financial services by legislating for:

a. a branch closure protocol to help protect customers and staff;

b. the ACCC to have increased powers to monitor and report on bank fees and insurance premium movements; and

c. no frills transaction accounts for social security recipients and low income earners.

4. To provide safe, challenging and rewarding employment opportunities a legislative framework must be put in place that overhauls the current Workplace Relations Act 1996 to ensure that workers and union rights are protected, and that all workers have access to fair and relevant award wages and conditions.
5. Amend the Financial Services Reform Act to provide for a comprehensive review of the implementation of the reforms with particular reference to:

(i) Stakeholder impact;
(ii) Implications for workloads and staffing/service levels;
(iii) Implication for sales targets; and
(iv) Training provision, recognition and accreditation within the Australian Qualifications Framework.
(v) Provide a provision for a training guarantee that promotes investment in skill development and retention.

6. Amend the Trade Practices Act to ensure consumers know the identity, city, state and country where the customer service employee is located.
7. To compliment all of the above legislation the industry must be compelled to implement world best practice in corporate governance, specifically in regard to embracing corporate social responsibilities.
8. Amend the Corporations Law to:

a. address the spiralling and unbalanced growth in executive remuneration;
b. ensure absolute independence of auditors;
c. require boards to be comprised of a majority of independent directors;
d. ensure that directors of financial service providers have the capacity to fulfil their duties by sitting on no more than four listed corporation?s boards at any one time and cannot serve as chairpersons of more than one ASX listed company; and
e. ensure that directors of financial service corporations are people of honesty and integrity and incorporate the right to disqualify directors where they have failed to meet their liabilities including employee entitlements and superannuation contributions.

Preamble

History

In the past decade Australia?s finance industry has undergone massive change as a result of deregulation, changes in technology, privatisation and an increased emphasis on shareholder return.

These changes have not delivered for customers or staff. Deregulation was supposed to lead to increased competition; increased competition was to lead to more choice and better service. Better service was also to flow from management restructuring and changes in service delivery. Streamlined structures and electronic modes of service delivery, while painful in the short-term, were to lead to greater job security, better wages and better trained staff.

The captains of industry continually told an increasingly sceptical public that the changes were for their benefit or indeed as a direct result of customer demand, but the results have been less than customer friendly.

Competition, closures and employment

Instead of increasing levels of competition, Australia has one of the most highly concentrated banking markets in the world resulting in reduced choice for the consumer.

A recent round of mergers and acquisitions has also occurred in the Australian insurance market, with the emergence of super general insurers such as the IAG and Promina Groups.

Australian bank customers and communities have witnessed the closure of over 2,000 bank branches, withdrawing access to full financial services and local employment opportunities from communities.

Instead of improved customer service levels, standards have fallen as a result of devastating staff cuts. 55,000 full time jobs have been shed by the major banks alone in the past decade.

Australia?s political parties need to remain committed to a policy of maximising competition in the industry and enshrining a more rigorous public interest test regarding the social impacts of any future merger or acquisition proposal within the sector.

A strict legislated protocol for the closure or downgrading of a point of representation of an Approved Deposit-taking Institution (ADI) must be adopted given the failure of self regulated protocols.

Training and skill development is critical for the finance industry as it enables employees to deal with change, builds on existing skills rather than losing them and helps provide a more flexible and productive workforce making the industry more globally competitive.

Emerging skill needs must be addressed by the industry to prevent future skill shortages and the further displacement of workers. We must commence building our industry?s and our nation?s skills in financial services and information technology if we are to be a vibrant financial hub in the future.

In many companies we are witnessing a further intensification of work for staff without corresponding adjustments to staffing levels or sales targets. Some companies have gone so far as to use the Financial Services Reform Act (FSRA) introduction as an excuse to increase sales pressures on staff, a process that would seem to run counter to part of the intent of the legislation.

The non-prescriptive implementation of the legislation by the ASIC has given rise to enormous diversity in its application from adopted training standards to support provided to frontline sales staff. The opportunity to establish genuine industry wide recognised and accredited skill formation under the auspices of the Finance Industry Training Authority Board has not been seized by the industry.

A comprehensive review of the implementation and compliance with the FSRA needs to be undertaken. Such a review should incorporate, but not be limited to, the impact on all stakeholders ? employees, consumers and employers; training provision and support provided to staff; training provision, recognition and accreditation within the Australian Qualifications Framework; portability of skills across the industry; impact of the FSR on workloads; and any staffing adjustments made.

The purpose of the review would be to assist and encourage the industry to meet its responsibilities to consumers; to ensure that the onus of compliance lays with the company not its employees; and to build a better skills base amongst the industry?s workforce.

Outsourcing, co-sourcing and off-shoring of jobs

Australia?s finance industry, like that of its counterparts in the OECD (particularly the UK and US) finds itself on the verge of another round of loss of jobs and skills as a result of the growing desire by employers to outsource work.

Outsourcing on a domestic front has seen thousands of jobs moved off the books of finance companies and to multi-national companies such as EDS or IBM Global Services (IBM ? GSA). While many of these jobs have been in the IT sections of the finance companies, outsourcing is not limited to IT alone.

Outsourcing of functions such as mortgage processing and cheque processing has already occurred.

Co-sourcing, or combining processes with competitors and outsourcing the functions, is also gaining popularity with employers. Westpac, Commonwealth and National Australia Bank?s are in the process of combining their cheque processing functions and putting them out to tender to another party.

Apart from the potential job loss associated with this process, it raises a number of questions regarding privacy, security of documentation and whether the banks are manoeuvring to enjoy the spoils of a prohibited merger.

The ACCC is currently conducting a market review of the co-sourcing arrangement being sought by the banks. Reports from the banks themselves suggest that the ACCC is unlikely to raise objection with the process.

The Treasurer has also been notified of the proposed transaction and is continuing to examine it in respect to section 63 of the Banking Act.

By far the most significant concern for the Australian finance industry, jobs and skill development is the growing global trend to off-shoring. Many of the company?s who have picked up the outsourced work from Australian finance companies, are the same companies who have embarked on major off-shoring of US and other countries jobs to their operations in Bangalore and elsewhere in Asia.

US Senator and Presidential Candidate, John Kerry, said in introducing a bill to tackle the off-shoring of jobs in the US, that some 500,000 finance industry jobs are likely to go over the next five years. In the UK, in the last 7 months since October 2003, more than 14,000 jobs have been moved off-shore and a survey of the companies revealed this was just the pilot stage.

The movement of capital across national boundaries is driven by a ?race to the bottom? in employment conditions. A call centre worker in the Philippines earns $4,000 US per year compared to a US call centre worker on $46,000.

Pilipino workers are required to respond to 400 calls per day ? in Australia it is closer to 80.

The Finance Sector Union calls believes the threat posed to Australian finance industry jobs and skills by off-shoring over the next decade is likely to pale the branch closure and downsizing processes of the 1990?s into insignificance.

FSU is actively engaged with its international union, UNI, to seek ways to support workers in other countries from the levels of exploitation they face. Part of this activity must commence at home with Australian licensed finance companies, committing as part of their licensing arrangement to honour minimum global labour standards.

Further, we call on political parties to support a test case through the industrial relations commission, to establish strict protocols in the advent of proposed outsourcing and off-shoring including maximum notice periods, consultation at both the departing and arriving ends of the operation and no forced redundancies. FSU is also calling for a legislated response from Governments that sets out the consumers right to know who they are dealing with and where they are located.

The FSU is of the view that this issue demands immediate and serious attention from our politicians and calls for a national summit to be convened to consider the implications for Australian jobs and for an appropriate legislative response to be adopted.

Fees and premiums

While the public enjoy greater flexibility in accessing transactional services through EFTPOS, ATM?s and the internet, they are paying for the privilege through ever increasing fees and charges.

There has been a massive increase in insurance premiums, attributed by the industry to the post September 11 environment and the crash of HIH, that has crippled many small businesses. This has led many state governments to legislate to limit common law damages. Yet there has been no corresponding service improvement through greater staffing numbers or other improvements for customers in terms of product or price, with the extra revenue going straight to increased profits.

The ACCC needs a strengthened role in monitoring and reporting on banking fees and insurance premiums across the finance industry.

Profits, profits and more profits

The dominant players and those who have swooped on the crumbs are reporting massive profits.

The four big banks posted a combined after tax profit of some $10.49 billion. Add to this St.George?s $606 million and the 100% 2003 bounce back by QBE to $572 million, IAG at $302 million and Suncorp?s interim profit up 81% to a record $281 million and it can be seen that there is no lack of profits to be made in the industry.

For the employees and customers who help deliver these incredible results the question is where does the money go? It is clear to them that the riches do not flow to better pricing, better products, more jobs and better pay and conditions.

Corporate Governance

Our industry has suffered from prominent examples of poor corporate governance, short-term planning and individual greed. Executive remuneration has reached staggering proportions with options issues and bonus payments topping up pay packets to the point where it is possible for a CEO to make as much as 300 times the average annual customer service officer wage.

In addition to their annual remuneration, executives in the industry pick up ?golden hellos? and ?golden parachutes? and all the forms of ?golden? treatment. These packages defy the comprehension of the general public, shareholders and the vast majority of employees. They are often referred to as ?market rates? or ?market driven? ? clearly an example of market failure if ever there was one.

The collapse of HIH demonstrated the worst corporate governance failings seen in Australia?s history. With an estimated impact on the economy of some $5 billion and the loss of one thousand jobs it was a disaster of monumental proportions. The collapse of HIH is still being felt by both insurance policy holders who are paying much greater premiums and by the whole finance sector, whose image was dealt a severe blow.

The Corporations Law must be amended to ensure that directors and executives of listed finance companies act in both a transparent and accountable manner and comply with best practice corporate governance procedures.

Words and deeds

It was the Finance Sector Union who commenced the process of demanding that companies in our industry recognise their social obligations which resulted in the drafting of a social charter for the finance sector. A copy of this charter is available from the FSU website (www.fsunion.org.au) and should be used as a guide and background document by government and business in applying and complying with the recommended legislative framework we are putting forward here.

In response to the ?social charter? we have begun to see individual companies in the sector move their language in recognition of the community?s displeasure with their behaviour. From the ultra arrogance of the late 1990?s when bank CEO?s would brazenly tell the public that they had no community service obligations, we have seen the shift to language of ?social charters of responsibility?, qualified moratoriums on branch closures and recognition of the importance of stakeholders other than shareholders.

Many of the ?charters? and programs referred to in the annual reports of Australian finance companies are self determined, self evaluated and lacking the rigour of genuine consultation and involvement of stakeholders. The results derived are therefore not reflective of the daily realities and often deceitfully and cynically used for the purposes of seeking to improve market positioning.

Changing words to present a better public image is much easier than changing behaviour. Downgrading and closing of branches continues amongst the major banks, fees continue to spiral upwards, significant staff cuts are still announced to gain short term spikes in share price and executive remuneration rockets upwards without corresponding performance scrutiny and accountability. The reality remains that self regulation of the finance sector has failed the Australian community.

The rhetorical recognition of corporate responsibilities and of stakeholders other than shareholders is no substitute for the role of government in ensuring companies in this sector, who provide an essential service and enjoy a privileged market position, are compelled by law to meet their obligations.

As has been noted elsewhere ?The fact that business is suddenly prepared to take all these voluntary initiatives in no way justifies less regulation. On the contrary, the recent corporate scandals suggest that we need more.?

The industry requires legislation that enshrines obligations to all stakeholders, not simply the vested interests of shareholders alone. Such legislative requirements would compel the industry to act in a socially responsible manner with regard to their employees, customers, shareholders and the community in which they operate.

Such regulation poses no threat to those companies that have or are prepared to adopt recognised corporate social responsibility (CSR) measures and reporting processes such as the Global Reporting Initiative (GRI). Nor should voluntary adoption of GRI be seen as a reason not to progress the process via legislation.

The legislation will benefit those companies already moving on the issue by recognising the work they have already undertaken and rewarding them, particularly by redressing the cynicism of the community, providing them with a competitive advantage and adding further rigour to the CSR process.

Vision and Progress

The industry lacks a shared vision and a coordinated plan for its future. The current federal government has not articulated a vision for this industry nor have they sufficiently acted upon the recommendations that relate to financial sector obligations that have emanated from a range of inquiries.

The latest of these inquiries, the ?Money Matters in the Bush? report of the Joint Parliamentary Committee on Corporations and Financial Services recognised that access to financial services is essential, but stops short of recommending a legislative response from government, despite recognising the weaknesses in industry self-regulation.

The Finance Sector Union, representing more than 60,000 employees across the industry, calls upon the federal government to act to compel the industry through legislation to meet its social obligations.

A Vision for the Australian Finance Industry

The Finance Sector Union has a vision for the Australian finance industry that is based on sustainability, accountability and investment in Australia?s future.

The Finance Sector Union wants the Australian finance industry to be a professional and accountable industry, comprised of a range of diverse companies employing hundreds of thousands of Australian workers, focussed on providing excellence in product development, marketing and customer service.

The investment made by these companies in their staff, their communities and their customers will drive the industry to sustained profitability and towards becoming a regional hub of financial service provision in the global marketplace.

The future success of our industry is contingent upon regulation by the Australian Government to ensure:

• Maintained diversification and competition throughout the industry in the national interest.

• Provision of universal and equal access to trusted and secure financial services;

• Provision of safe, challenging and rewarding employment opportunities;

• Implementation and accountability to world best practice corporate governance procedures.

Legislative changes needed for a better finance industry

The behavioural history of organisations in the finance sector demands government intervention to compel companies to comply with the social obligations that are intrinsically linked with being licensed to provide an essential service to the community.

To achieve the vision articulated above the Finance Sector Union calls for the following consultative and legislative reforms to be enacted by the federal government.

1. Establish and empower a Financial Services Advisory Board under the auspices of the Federal Treasurer that is comprised of industry stakeholders, specifically company representatives, union representatives, consumer representatives and community representatives, to assist the government in the implementation of the following legislation and to advise on industry developments.
2. To maintain in the national interest, a diverse and competitive industry:

a. amend the Banking Act 1959 s. 63 to enshrine the ?four pillars? policy of not allowing mergers between the four largest Australian banks.
b. amend the Banking Act s. 63 to build in provision for a Public Interest Impact Assessment (PIIA) process by which to determine the merits of a proposed merger or acquisition of an Australian licensed bank that includes the following measures:
ii. A social audit to determine the impact of the merger/acquisition as it effects the concentration of economic power, employment, communities and access to essential financial services.
iii. A period for public consultation.
iv. The power to block a merger/acquisition that is not in the public interest as defined by both the social audit and the competition impact assessment as determined under the Trade Practices Act.
v. The capacity to require of the merger/acquisition parties binding undertakings to mitigate negative social impacts of the merger/acquisition.
vi. The power to fine the parties for failure to implement undertakings.
c. amend the Banking Act to ensure ADIs must apply to the Treasurer for permission to enter co-sourcing arrangements. Such arrangements must be subject to the above PIIA process.
d. amend the Insurance Acquisitions and Takeover Act 1991 s. 5 to reflect the same provisions as those specified in b. above.

3. To ensure the provision of universal and equal access to trusted and secure financial services:

a. amend the Banking Act to introduce a branch closure protocol that includes:
i. a minimum notice period of 6 months be given to staff and the community about a proposal to close a bank point of representation or to reduce banking services provided in a point of representation;
ii. an impact statement to be produced by the responsible bank or Approved Deposit-taking Institution (ADI) that outlines reasons for the change, an assessment of alternative means of the services being provided and the likely economic impact of the change on the local community;
iii. the requirement to undertake genuine consultation with the community; and
iv. implementation of an employment assistance program covering retraining and redeployment initiatives.
b. give the Australian Competition and Consumer Commission (ACCC) greater powers to inquire into fees and prices of the finance industry and to monitor and report to Parliament on bank fees and insurance premium movements under the Prices Surveillance Act.

As part of its inquiry, the ACCC should be empowered to ensure that access to fee free, no frills transaction accounts are available to social security recipients and low paid workers, and that access to and the costs associated with the provision of financial services are consistent throughout Australian communities, regardless of demographic differences. The ACCC should also seek to report on commensurate increases in services provided by those companies seeking to increase fees and premiums.

4. To provide safe, challenging and rewarding employment opportunities a legislative framework must be put in place that overhauls the current Workplace Relations Act 1996. Such legislation should:

a. provide for worker and union rights in relation to collective bargaining which, as a minimum, meet the standards set by international law and are comprehensive, enforceable and facilitate union organising;
b. ensure that all workers have access to fair and relevant award wages and conditions in the context of living standards generally, and as a basis for bargaining;
c. enable compulsory conciliation and arbitration of all industrial disputes; and
d. facilitate the operation of independent and genuine industrial organisations with the capacity to effectively represent members.
A comprehensive guide to the required amendments and repeals of the Workplace Relations Act 1996 are available from the ACTU website (www.actu.asn.au).
e. amend the Financial Services Reform Act to provide for a comprehensive review of the implementation of the reforms with particular reference to:
(i) Stakeholder impact
(ii) Implications for workloads and staffing/service levels
(iii) Implication for sales targets
(iv) Training provision, recognition and accreditation within the Australian Qualifications Framework
(v) Provide a provision for a training guarantee that promotes investment in skill development and retention.
f. amend the Trade Practices Act to include legislation that allows any consumer who receives a telephone call from, or places a telephone call to, a financial service provider, upon request, has the right to:
i. know the identification of the city, state and country where the customer service employee is located;
ii. know the name of the employer of the person with whom the person is speaking;
iii. speak to a qualified employee of the company or government agency the person is doing business with.
g. amend the Trade Practices Act to ensure that no Australian resident who provides their financial, credit or identifying information to a financial service provider shall have that information sent to any foreign country without the express written permission of the individual.
h. as a condition of satisfying licensing provisions to provide financial services in Australia, financial service providers must agree to provide minimum global employment conditions consistent with ILO conventions.

5. To compliment all of the above legislation the industry must be compelled to implement and adhere to world best practice in corporate governance, specifically in regard to embracing corporate social responsibilities. We call for amendment to the Corporations Law that:

a. codify into the Corporations Law Principle 10 (Recognise the Legitimate Interests of Stakeholders) of the ASX Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendations making the provisions therein mandatory for listed licensed financial service providers with the following additions:
i. in determining codes of conduct in relation to stakeholder groups, the relevant corporation must include proper consultation with relevant representative bodies including trade unions and consumer groups;
ii. the codes of conduct must form the central goals for the organisation and be approved by shareholders as part of their deliberations at Annual General Meetings;
iii. performance against the goals approved by shareholders must be subject to independent auditing; and
iv. auditing must take into account the assessment by the relevant representative bodies of the corporation?s progress against the goals.
b. amending the Corporations Law to address the spiralling and unbalanced growth in executive remuneration by:
i. compelling directors to set performance measures for executive remuneration increases and bonuses against the goals determined through the process described in 5a as well as against share price performance;
ii. ensuring that all equity based remuneration and their underpinning performance measures for executives are subject to the approval of shareholders;
iii. ensuring executive remuneration details, including commencement and termination benefits, be disclosed in the corporations annual report under ?remuneration report? and include the ratio between highest and lowest paid in the corporation, employment levels and performance in relation to stakeholders; and
iv. ensuring that the corporations remuneration report be subject to a vote on a binding resolution by shareholders.
c. Providing trust and security through stability in the industry by amending the Corporations Law to:
i. ensure absolute independence of auditors;
ii. ensure that boards are comprised of a majority of independent directors as defined are independent in accordance with Australian Council of Superannuation Investors (ACSI) and Corporate Governance International (CGI) corporate governance guidelines;
iii. ensure that directors of financial service providers have the capacity to fulfil their duties by sitting on no more than four (4) listed corporation?s boards at any one time;
iv. ensure that chairpersons of financial services listed corporations cannot serve as chairpersons of any other ASX listed company; and
v. ensure that directors of financial service corporations are people of honesty and integrity and incorporate the right to disqualify directors where they have failed to meet their liabilities including employee entitlements and superannuation contributions.

Other amendments sought to the Corporations Law can be found in the FSU submission on Exposure Draft CLERP 9 ( www.fsunion.org.au ).

Chance to deliver a stronger, more sustainable finance industry

The FSU believes that the Australian finance industry stands at the crossroads. Decisions must be taken by politicians, corporations, stakeholders and the Australian community about the next path ? further concentration of power and disregard for community responsibility or a regulated, trusted partnership approach to a sustainable future.

The FSU calls on the relevant interested groups not to miss this chance to deliver a sustainable industry that provides trusted essential services to the community as well as building skills and qualities for our nation?s future.