Faked pay slips, forged documents and cash-stuffed envelopes used as bribes to secure loans are just some of the examples of dodgy practices exposed so far by the banking royal commission. But before you think “some people will do anything to get a mortgage”, it’s crucial to remember that the people carrying out these frauds were actually bank staff.

The evidence paints a picture of an industry captured by people falling over themselves to get rich quick on commission-driven schemes to dish out ever bigger mortgages to borrowers who cannot afford them. Research by the investment bank UBS has estimated that up to $500bn in mortgages could consist of so-called “liar loans”, or nearly one-third of all mortgages.

So if you had always thought that Australia’s banking system was well-managed by upstanding people and well-regulated by Eliot Ness-type bureaucrats, and therefore immune from the systemic disasters seen in the UK and the US 10 years ago, then maybe think again.

There is evidence to suggest regular and widespread criminality has been committed by industry since the 1980s. Over the past two decades, Australia’s leading financial consumer activist and president of the Banking Finance Consumers Support Association (BFCSA), Denise Brailey, has obtained many loan application forms that demonstrate mortgage fraud.

Further evidence pointing to criminality in lending is based on the research of the world’s leading academic specialist in banking fraud, Prof William K Black. He was a former US thrift regulator during the 1980s, cleaning up illegal industry practices and also warning about the epidemic of subprime mortgage fraud during the 2000s.

He developed the concept of control fraud, which is where the people in positions of power within an organisation use it to carry out fraud. Control frauds are generated and amplified by the conservative neo-liberal agenda, which has significantly and regressively altered the financial services industry since the 1980s. Privatisation, deregulation, self-regulation, desupervision and de facto decriminalisation has created a criminogenic environment: a toxic organisational setup which is conducive to criminal activity.

By removing constraints on lending, household debt has ballooned to historical and global extremes, which explains Australia’s unaffordable house prices. Rather than enhance efficiency and competition, failed conservative economic ideology has produced excessive financialisation, banks that are too big to fail, record private indebtedness, gigantic asset bubbles and numerous control frauds.

Along the line, industry has shifted from prudent to imprudent to potentially breaching lending laws. Rather than rein in runaway household debt, regulators have let the industry run wild while constantly claiming to “keep close watch” over lending practices.

Borrowers have been betrayed by the regulators’ neglect, despite their knowledge of the mortgage control fraud. Even worse, regulators are drawn from industryitself (the revolving door) and the entrenched conflict of interest via ownership of real estate and stocks in the industry they are supposed to regulate. Their registers of financial interests are carefully concealed from the public, something that must be subject to discovery by the royal commission.

Brokers have featured prominently in the royal commission so far, given their important role in mortgage lending. They are responsible for arranging about half of all loans. It is common knowledge that brokers face perverse incentives to maximise loan volumes given origination and trailing commissions.

The broker network was developed by industry to function as a bullet-shield between itself and borrowers. If allegations of fraud arise, lenders will blame brokers. They function as the “fall guys” or “dupes” who can easily be thrown under the bus. On Monday ANZ’s home loan boss admitted that the bank did not bother to check the details of personal living expenses (and therefore their affordability) on loan applications when they were submitted by brokers.

The question of whether brokers are the agents of borrowers or lenders is important. Banks have repeatedly claimed the former but the former banking ombudsman Colin Neave argued that brokers are the agents of lenders. The courts have also ruled accordingly. Any fraud committed by brokers is the legal responsibility of lenders and cannot be attributed to borrowers.

The royal commission was the opportunity to examine how the government and the economy have come to be dominated by the financial industry and uncover wrongdoing in the sector. But it has been sabotaged by the Turnbull government, by being given limited resources and only one year. Given the size and complexity of industry, it is a near impossibility that it will be able to thoroughly examine this issue.

If the ALP wins the next federal election, it can change the terms of reference, provide more resources, expand the number of commissioners and allow for at least half a decade. As the royal commission into the institutional responses to child abuse demonstrated, entrenched organisational criminality takes time to uncover and prosecute.

Accountability and transparency needs to be restored to the financial services industry, as confidence in the economy is built on the essential pillar of trust. Industry must not be able to commit and profit from control fraud, despite this becoming a way of life for some bankers.

 Philip Soos is an economist and PhD candidate investigating Australian bank crime and mortgage control fraud at Swinburne University of Technology


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