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6 Thoughts on the Banking Royal Commission

February 7, 2019
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Reading Time: 5 Minutes

“An old man looks across the table to a middle-aged man… the old man is clearly unimpressed, but the middle-aged man ignores him and grins for the cameras… knowing full well this will make the 6 o’clock news.”

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Compare the pair.

What a week it’s been right!

Because late on Monday afternoon, we had the results for the Banking Royal Commission.

The final report had the legs to be the biggest shake-up of the Australian financial services industry.

EVER.

So much so that…

Whoa, back it up a bit TheFrugalSamurai… what are you referring to?

Oh… sorry guys – got ahead of myself there!

For our international friends who might not be aware, these last 12 months or so has seen very interesting times here in Australia.

To paraphrase Hamlet, something rotten is in the state of…er… Oz.

Our banks and financial sectors for too long have gotten away with greed, malpractice and putting their own interests first for the bottom line.

Stories such as deceased people still paying for insurance premiums, or evicting retired pensioners due to failed loan guarantees hit a personal chord with the Australian public.

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“Excuse me Sir, have you paid this year’s premium yet?”

The people bayed for blood and we got the Royal Commission.

(A Royal Commission is effectively the highest level of investigation and enquiry, similar to a US congressional hearing).

We’ve heard appalling stories and practices across our financial services sector during these 12 months culmination in Monday afternoon’s public release of the final recommendations and report.

But ya know what?

After it was released, everyone in the industry breathed a HUGE collective sigh of relief.

Because the 76 recommendations, albeit industry changing, could have been far, far worse.

Here’s what I think of the recommendations:

Changes to the industry? I think not…

This was supposed to be it.

The great reset of our financial industry. When big sticks would be applied to big men.

 

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Miss the old days when you can just molly-coddle.

But as far as I can tell (and I’m only two-thirds of reading the full 530 page report, yes I lead an interesting life, no I’m not single, sorry ladies), there aren’t any major significant changes recommended.

There was talk of our banks splitting up their business models (e.g. bank-owned wealth manager recommend customers the banks own products), but this isn’t the case.

Changes to the law? Nah!

There was great talk, and trepidation, that existing laws and regulations would need to be changed to provide fairer and safer consumer outcomes off the back of the interviews and case studies.

This hasn’t been the case. Commissioner Hayne emphasized he didn’t see any reason to change the law, only that they need to be enforced better.

OI regulator! Pull up those socks! 

He did mention however that our regulators need to do more and act more. He wants them to really go after the banks and not be shy about it when they do wrong.

Good news for regulators as they’ll get a bump in funding levels I’m sure… and then quietly taken away by the inevitable budget cuts…

How’s our credit?

This was probably the most important consideration of all.

Throughout the hearings last year, the banks tightened their credit standards more and more to the extent credit was difficult to come by for just about everyone.

The recommendations could really have turned the screws tighter, and further a credit squeeze leading the economy into a recession.

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Stared at this for a full 2 minutes… mesmerizing.

This hasn’t happened, mainly I think because banks applied the screws themselves all through 2018.

The Biggest Loser…

I found this to be the most ironic and impactful recommendation.

Commissioner Hayne recommends banning trail commissions for the mortgage broking industry, as well as transitioning to a fee-for-service system.

In Oz, our mortgage brokes are renumerated by the lenders in the form of an upfront (usually 0.5-0.6% of the loan amount) and a trail commission (usually 0.15%-0.25% for the life of the loan) – all paid by the lender/bank. The borrower (us) don’t pay.

In theory it makes perfect sense, if you see your accountant, or dentist, or plumber – you are expected to pay them when they perform a service.

But in practice, this recommendation has just shot a rocket up our banks’ bottom line, as well as killing the broking industry, and with it – competition.

I doubt, many of us will pay a few thousand to a broker when we can just walk into a bank branch and get the same loan.

As 80% of lending is shared amongst the big 4, and 80% of their revenue is from home loans – you can just see themselves rubbing their hands with glee.

This is terrible news for consumers, as killing the mortgage broking industry without implementing a system for the average consumer to navigate the complex world of mortgage finance is a sure-fire way for ripping people off indirectly.

Don’t just take my word for it, have a look at the share price of our 4 biggest banks and 2 largest mortgage brokers when market opened Tuesday:

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You couldn’t script this if you tried…

Capitalism to blame!

An oft repeated word throughout the Final Report is “culture”.

“Why did it happen..? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?

Staff were motivated by money, by reference to profit and to sales and the bottom line.

Now, hang on a sec…

Banks and bank staff are motivated by money? By making profits and through making sales?

Should we just remove profit-motives from banking, sit around the campfire and sing Kumbaya?

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“I love you, you love me, we are one big family.”

Sorry for sounding facetious but I find this bordering on the naive.

Of course, when you are living in a capitalistic society, in a profit-driven environment, the few people with low ethical standards do things people with higher standards wouldn’t do.

But repeating the word “culture” isn’t going to change anything – banks have already responded with KPI and “culture” changes internally pre-Royal Commission.

I think the word “culture” has just been thrown around to avoid the fundamental issue at hand.

That the banks and the financial sector was allowed for too long to go unchecked, to accumulate disproportionate amount of power and to abuse this power to their advantage.

If you REALLY wanted a culture shift, then hit the banks where it really hurts – their bottom line.

MAKE the decision to go hard into the financial services industry, and for the fallout to be so memorable, that no one in the industry will forget this moment in their career.

That will guarantee a culture change.

Instead, expect lobbyists and our politicians to play political handball with these recommendations.

And for legislation and legal proceedings to drag on for years until the memory of this Royal Commission will just fade along with the others.

BAH humbug!

Might have to just buy some bank shares myself.

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