Payback time for Australia’s corrupt banks

Australia’s tainted financial sector faces its biggest shakeup in a decade after damning findings of a year-long Royal Commission inquiry were handed down on Monday. To what extent the commission’s wide-ranging proposals are to be implemented will likely be a key campaign issue as the country gears up for elections later this year.

Treasurer Josh Frydenberg said the government will take action on all 76 recommendations of the commission into misconduct in the industry, which heard that banks levied fees on dead customers, sold packages they knew were worthless and charged clients for services that were not rendered.

“There have been broken businesses, and the emotional stress and personal pain has broken lives,” Frydenberg said at a press conference. “From today, the banking sector must change and change forever.”

Bringing about that change will be the responsibility of government, as the commission, which heard 10,000 public submissions during the past year, has no legislative power. Its report, presented by former high court judge Kenneth Hayne, addressed only cultural and regulatory gaps, especially the headlong pursuit of profits at the expense of services.

“Providing a service to customers was relegated to second place. Sales became all important,” commissioner Hayne said in his comments. “Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards.”

Frydenberg said the government will implement the commission’s recommendations on structural reforms, including sweeping new powers for regulatory bodies like the Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority, and appoint a new agency to monitor their performance. A new customer disputes resolution agency is also planned.

However, hopes that the commission might try to break up the vertical integration models that underpin financial services were dashed: it left this role to the strengthened regulators. Similarly, there was no direct lobbying for higher bank lending standards or improved governance.

These issues are already being addressed by the regulators concerned. On the eve of the report’s release, the ASIC banned a Commonwealth Bank financial planning unit from charging any fees or taking on new customers because it was still charging customers despite having offered no services.

Lending rules have been tightened, and Commonwealth Bank, Westpac, National Australia Bank and Australia New Zealand Banking Group, Australia’s “Big Four” banks, have voluntarily started to phase out or reduce their charges.

The commission also did not recommend that criminal or civil action be taken against specific individuals in the industry, but listed 24 referrals of companies to regulators for breaches of the law. The government has said these referrals could be applied to individuals as well as their firms.

Initially opposed to a Royal Commission, Prime Minister Scott Morrison’s government is now left with little option but to implement its proposals, as any perceived weakness in doing so will likely hurt his chances in a general election expected in May.

The opposition Labor Party, which is tipped in opinion polls to win the election, said even before the report’s release that it would adopt all the recommendations.

Morrison had initially dismissed Labor’s call for a commission as a “populist whinge.” He has since warned against overreaching and cutting off credit flows, an issue that is likely to feature on the campaign trail.

Politicians on both sides are in a tough spot, as stricter lending rules aimed at weeding out marginal loans will inevitably impact on the availability of credit.

Some preliminary estimates suggest that the maximum borrowing capacity of consumers could fall by as much as 30%, having a potentially devastating impact on consumption in an already softening economy.

A pre-emptive tightening by banks since mid-2018 has been one factor behind a recent slump in housing prices that has mostly affected key markets in Sydney and Melbourne. Defaults will likely rise along with higher servicing costs on loans.

There are signs the central bank may reduce its benchmark interest rate to boost spending, but it may not be enough to avoid a deeper economic slowdown. Lower growth of 2.8% is already expected in fiscal 2019, from 3.2% in 2017-18, partly because of lower housing activity in major cities.

Bank finances have also taken a big hit, with the big four (Commonwealth Bank, Westpac, National Australia Bank and Australia New Zealand Banking Group) losing a combined US$46.4 billion of their market values in the past year. Profits were equivalent to 2.9% of gross domestic product (GDP) in 2016/17, one of the highest levels of any economy, but are believed to have since declined.

As four of the seven biggest listed stocks on the local bourse, the big four banks have US$2.6 trillion of assets reaching into every financial services sector, including superannuation. This concentrated level of holdings has also distorted credit markets: at least 80% of borrowers now have a loan with one of the big four banks.

Victims of the banks’ excesses have welcomed the inquiry findings, but are waiting to see whether they will be fully implemented by the government once the election is held and a new administration installed. Those doubts come from the knowledge that banks still have powerful political connections.

“I think that we need to make sure that whatever changes are put in place go all the way to the top and they’re not able to just be paid lip service to,” Karen Cox, chief executive officer of the Financial Rights Legal Center, told the publicly funded Special Broadcasting Service. She gave evidence at the inquiry, the report said

“I think we certainly have one rule for people who steal from their employers or rob people on the street and another for people who do it behind the corporate wall who effectively have other people’s money in their custody and help themselves to it,” she said.

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