The big four banks in Australia have a monopoly on our money. And with the banking royal commission now underway, it will be interesting to see how the findings alter our expectations of the banks.
After all, they’re the ones we trust with our money.
When banks assume they’re untouchable, it’s never good for consumers. So now that the big four, NAB, Commonwealth, ANZ and Westpac have been found out, what’s going to happen to them?
And what exactly can the royal commission do to the big four banks? What can consumers get out of it?
Well…not a whole lot.
While the banks may be humiliated and reprimanded, and while their stocks may fall due to a lowering of consumer confidence…all the commission can really do is demand that the banks tell all.
The commission can then give recommendations to the federal government. But whether the banks do anything, or even take on these recommendations, is a whole other story.
Furthermore, the commission is unable to force the banks to pay compensation to any wronged consumers.
The banking royal commission was requested by a reluctant Malcolm Turnbull, after reports surfaced of a financial planning scandal by the Commonwealth Bank.
Coalition lower house members threatened to cross the floor if Turnbull didn’t announce a banking royal commission. And after the banks agreed to one, there really wasn’t much more of a choice for the Prime Minister.
So what is a royal commission?
As stated by the ABC, a royal commission ‘can be called on any matter “connected with the peace, order and good government of the Commonwealth or any public purpose or any power of the Commonwealth”.’
And what can they make the banks do?
The royal commission can make the banks hand over documents pertaining to the inquiry. However, the banks are not required to create new documentation that will help the commission.
They can also subpoena witnesses to give evidence regarding the bank’s conduct.
A person may also be required to make a statement, in person or writing, about the bank’s conduct. This is intended to help investigators gather an overall picture of the bank’s conduct.
And if the banks don’t comply with the commission’s requests, although in this case all four banks have agreed to comply, those involved could face up to two years imprisonment.
According to the ABC, the PM stated that the commission ‘will cover the nation’s banks, big and small, wealth managers, superannuation providers, insurance companies. It will be a comprehensive inquiry.’
But in circumstances where the royal commission cannot make the banks fork over compensation to their customers, it’s you that foots the bill for the inquiry.
The royal commission is paid for by the government, which means they used taxpayer dollars for something that can only provide recommendations for change.
And the recommended changes will only be put into place if the government creates new laws and regulations that the banks must adhere to.
What’s the cost of all this? $75 million.
A lot of money, considering nothing may come of it.
What does all this mean for you as an investor?
Well, when the royal commission was announced, the big four banks all saw a dip in the Aussie share market. And as AMP’s Chief Economist Shane Oliver states, the next 12 months could see a ‘potential overhang’ that could ‘impact all Australians’.
Even if you don’t own any banking shares yourself, your superannuation fund could potentially have been invested in to one of the big four banks. As Dr Oliver shared with AMP:
‘Banks and related financials account for almost a third of the value of the local share market, which accounts for some 8 per cent of each individuals’ superannuation exposure’.
For now, there’s uncertainty within the markets about how the royal commission will impact the banks. As Dr Oliver points out:
‘We don’t know which way it’s going to go — it may come to something more significant or it may lead to a lot more regulations. There’s a degree of uncertainty around this part of the market’.
While there is some anxiousness surrounding weaker share prices for the big banks, Dr Oliver told Money Magazine that the banks have a strong record of paying dividends, even when share prices are low.
The royal commission has 12 months to complete this inquiry. They’re expected to hand over their report 1 February 2019.
This Week in Money Morning
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Editor, Money Weekend