The emergency measures adopted by the ‘big four’ such as mortgage repayment deferrals for up to six months and slashed payouts to shareholders might have something to do with the bruising they endured during the Hayne Royal Commission. ME Bank wasn’t targeted in the commission, and its shareholders emerged from the process not just unscathed, but in a much stronger position.
“Industry super funds came through the royal commission smelling like roses,” says one big four banking source who spoke on the condition of anonymity. “This really evaporates a lot of the good will that industry super funds have enjoyed.”
Observers are now wondering how much damage the redraw policy change and reversal will do to ME Bank’s ambitions, and those of its shareholders, to build an alternative to the financial system dominated by commercial institutions.
‘Not according to plan’
Former Reserve Bank governor Bernie Fraser was instrumental in establishing Super Members Home Loans, the first iteration of ME Bank, in 1994. He then served as chairman from 2000 to 2015 as Members Equity Bank obtained a banking license and started to take share away from its commercial rivals.
“Members Equity Bank was starting from the other side. It was to provide banking services to industry super fund members,” Fraser says.
University of Melbourne financial planning expert Warren McKeown says it was an obvious choice for the industry super funds to set up a bank of their own after the Keating Labor government made superannuation compulsory in 1992.
“The next extension was to provide a banking service,” says McKeown. “They could have invested in the big banks themselves and got dividends there but they thought they would have enough capital to set up their own bank for members.”
The idea was to provide cheaper services and products than the big four. By encouraging industry fund members to switch their banking services to ME Bank, they could circulate profits back to the funds, benefiting members. However, Fraser says the development did not go to plan.
“Why hasn’t it worked out quite as grandly as I and others might have hoped? The main problem has been the inertia exists in getting people to change from an existing bank that they’ve been with for a long time.”
ME Bank made a $67 million profit last year, down about 25 per cent from a year earlier, and it did not pay a dividend. Its customer base sits around 500,000. The bank gets capital injections from the super funds that own it from time to time, says McKeown, who added the federal government’s emergency scheme that gives out of work Australians the ability to draw down on their super before retirement would create a squeeze for the bank.
“Now what we’ve discovered is that the super funds have probably run a little bit short of cash,” he says. “From ME’s perspective, they probably wanted to cut down on any redraw to reduce their cash outflow. And that pressure is coming from the super funds wanting to borrow money for cash purposes of the early release scheme.”
With the commercial banks, the pecking order is shareholders come first, executives come second…and the customers come last,”
Former RBA governor Bernie Fraser
ME Bank has emphatically denied the policy change had anything to do with liquidity, but was instead designed to prevent customers from falling behind on home loan repayments.
The bank’s shareholders have also strenously denied liquidity issues. The $44 billion super fund Hostplus, a major shareholder in ME Bank, has processed the lion’s share of early access requests, paying out around $1 billion of the $10 billion total applications. With its young members working largely in hospitality, sport and tourism – industries plagued by high unemployment during the coronavirus crisis – the fund had to double its cash buffer in March to $6 billion in preparation for a rush of withdrawals.
Chief executive David Elia has repeatedly defended the fund’s liquidity position and Hostplus says it does not have a line of credit with ME Bank and nor had it sold any shares in the bank recently. Nonetheless, Liberal MP Tim Wilson has called the bank before an emergency parliamentary hearing next week to answer questions about the relationship between ME Bank and the funds.
“Part of the problem is we don’t know much about how these super funds and their relationship to ME bank is structured. What is the nature of the relationship? What revenue sources go from ME Bank to the super funds? If it makes a profit where does that go?” Wilson says. “These are the sorts of things we will be exploring next week.”
Fraser says ME wanted to be competitive on not just fees, but service. The board of directors were not given fat bonuses or incentives linked to selling products and the bank’s strong union links saw it promoted through workplaces around the country.
“With the commercial banks, the pecking order is shareholders come first, executives come second, the bigger the dividend the bigger the bonus to management, and the customers come last,” Fraser says. “You look at ME Bank and it’s all about customers, they are the shareholders.”
Nowadays, the bank’s board features an array of private sector leaders including former CBA chief risk officer Jim Evans as chairman and MLC Life director and Afterpay director Elana Rubin.
“It’s not just union people, they’ve obviously got people with banking experience and employer and industry experience. So I don’t think there’s anything sinister about the control of the banks, but the strategy could be put in place by the CEO or managers to work out ways to restrict the cash outflow,” academic McKeown says.
Scores of customers who were affected by the rule change contacted The Age and Sydney Morning Herald to report stress and anxiety after money was disappeared from their accounts – an indictment against a bank that sold itself last year as an antidote to “banxiety” following revelations the banking royal commission.
“Stop scrolling and take a deep breath with ME,” its social media campaign says – a message one customer who requested anonymity disputed.
“I’ve been with this group for a very long time, over 20 years. I’ve seen the increasing corporatisation. They tout themselves as a bank for me, but it’s the bank for them.”
Charlotte is a reporter for The Age.