Why is anyone surprised when bankers engage in misbehavior behind the veil of opacity?  They shouldn’t be.  In the 1930s, the Pecora Commission documented opacity was necessary to hide bankers rigging markets and committing fraud.

Australia’s largest bank, Commonwealth Bank, provided the latest example of what happens when banks are not required to provide transparency.

But the cross-examination of this highly regarded professional, who was brought in to clean the place up, exposed the shortcomings of the industry for all to see.

For example,… the board had asked its former chairman, David Turner, to return 40% of his fees from his last 12 months.

Turner had refused. And what did Livingstone do about it? She didn’t bother disclosing the incident in CBA’s recent remuneration report, so shareholders were kept in the dark.

Senior counsel assisting the royal commission, Rowena Orr QC, asked Livingstone why she didn’t share the information with shareholders.

Livingstone replied: “Because the former chair did not agree to return any of his fees.”

Orr said: “Could I ask you to consider now whether that’s a message that you think should be sent publicly, that you made a decision as a board to request the former chair to return 40% of his fees?”

Livingstone replied: “In retrospect, yes, perhaps we should have made that public.”

It was telling that a professional like Livingstone didn’t feel the need to be transparent with shareholders about significant developments inside her boardroom….

Keeping shareholders in the dark assures the bankers and their boards are never subjected to market discipline.  After all, if the market cannot see what is going on, there is no way for it to exert its influence to stop bad behavior.

But the problem of bankers getting away with their misbehavior is more systemic than just refusing to return compensation earned by engaging in bad behavior.

Australia currently has all the necessary laws in place to protect society from banks committing financial crimes. But that is only in theory. The reality is that there has been no proper prosecution of systemic deceit and frauds committed against retail customers of our financial institutions.

Clearly the regulators are not up to the task of stopping bankers from behaving badly behind a veil of opacity.  So it is time to remove the veil.

Even in Australia, the financial system is based on transparency.  It is the only proven way of ending this behavior.

Why does it work?

Transparency allows everyone to see when the bankers engage in bad behavior.  Equally importantly, it puts tremendous pressure on the regulators to immediately put an end to this behavior.