It’s a tough week for the banks. Actually it’s going to be a tough 2018 for the banks. All year long. And next year. And the year after, and after that.
But don’t feel sorry for them.
No, that would be a mistake. Instead you should be kicking down the door of your bank asking them, ‘why?’
That’s the best question you should put to your bank every time they send you a statement. Or a bill. Or a warning letter. Or an offer to buy some financial product you don’t need.
You see for decades the big banks in Australia have been taking people for a ride. Fees and charges and products that people don’t need. They’ve gouged you and your neighbour to fill their boots with your money.
Now the gravy train is about to come to a grinding halt.
Today is spank a bank day
As you’ll see today there’s a Royal Commission going on. It’s an investigation into, ‘Misconduct in the Banking, Superannuation and Financial Services Industry.’
It’s giving the banks a royal hiding. Yesterday the CBA copped a pasting for not properly answering questions. They’ll cop it again today. And until 27 April they’ll cop it some more.
This is ‘Round Two’ of the Royal Commission. This round is focusing on financial advice from the major banks…and AMP.
It’s a chance to really drill down into the practices of how banks and financial services provide advice to people.
There’s a saying in the tech world, ‘too long, didn’t read’. It’s often abbreviated to TL;DR. It’s used so someone can provide a very brief summary of an unnecessarily long explanation.
So here’s the TL;DR of how the banks provide financial advice…
You put your money in a bank. They make virtually nothing off your deposit. To make money they need to sell you other stuff. They make real profits by selling you money…lending you money.
And then they figure they can sell you more stuff. They’ve got your deposits and your loans. In effect they’ve already got you by the ‘short ‘n’ curlies’.
Now they sell you fear. They sell you insurance. They sell you advice on how to pay back all the money they just sold you on. They sell you investments that might help you make more money to pay back the money they sold you. They sell you more money (loans) to sell you more investments from there.
At every step of the ‘relationship’ with your bank they are selling you something.
And wrapped up in this are extra little fees and charges. There are account fees. Maintenance fees. There are advice fees. There are premiums. There are ongoing advice fees. There are commissions and referral payments.
And because the bank owns the stuff they sell you, all these fees flow back into the bank.
But remember, it’s all about you the customer…give me a break!
There is one group of people the bank is responsible to. It’s shareholders. But even then, the biggest shareholders are super funds. Therefore it’s in superfunds’ interests to see the banks succeed.
Everything is intertwined. The whole Aussie banking and superannuation industry is malevolently patting each other on the back. One cannot exist without the other.
It should be no surprise of the five biggest companies in the country four are banks. The single biggest company in Australia is the Commonwealth Bank. They didn’t get so big by holding your deposits.
But if you still aren’t sure about the banking system rort, let me give you an example. In fact, this could be the biggest scandal in the history of banking.
$73.25 billion in compensation
In the UK there was a huge banking scandal. It was known as the PPI scandal. PPI is short for ‘payment protection insurance’.
It was designed to recover payments on loans and credit if the borrower can’t repay.
However there was a big problem with this. The problem is most people who had PPI never asked for it. They never were told about it. They never knew they had it.
Consumers were paying premiums for a product they didn’t even know they had or were paying for. PPI was typically sold on car loans or credit card lending.
But estimates are at the peak of PPI. There were around 45 million policies in place. The other big problem is that most of these PPI policies were ‘mis-sold’.
It’s believed as much as 40% of policyholders didn’t even know they had it.
And this mis-selling of PPI led to one of the biggest banking scandals in the world. British banks have now had to repay the premiums paid on PPI policies in compensation.
The total compensation bill adds up to around £40.2 billion (AU$73.25 billion). That’s money the major banks are paying back to people mis-sold PPI.
Lloyds Bank (one of the UK’s ‘Big Four’) alone accounted for £17.1 billion (AU$31.16 billion) they have to pay back.
To put that in context the Commonwealth Bank had total cash of AU$15.058 billion as of June 30 2017.
If a scandal like the UK’s PPI were to hit the ‘Big Four’ Aussie banks it would see them haemorrhage money. It would see their stock prices tumble. It would send a giant shockwave through the Aussie banking system.
I believe that scandal is coming.
And it’s coming in the mis-selling of financial products and policies that consumers never needed. I think the focus of this should centre on the banks and insurers charging exorbitant fees for a strange unknown product called ‘Lenders Mortgage Insurance’ or ‘LMI’.
‘The Aussie PPI’
According to Canstar:
‘Lender’s Mortgage Insurance is a condition of home loan borrowing where your mortgage lender may require you to make a one-off payment to protect them (the lender) against the event where you (the borrower) might fail to make your home loan repayments.’
All the banks charge this when home loans with more than 80% loan-to-value ratios are taken.
Let’s get this very clear. This is a very expensive premium. And you pay it to protect the bank if you can’t repay the loan. That’s right, you’re paying an insurance policy that protects THE BANK.
Some people never know they have LMI. It can be added to the home purchase costs, or added to the loan. Often it’s added to the loan. Ask the average person with a home loan and an LVR over 80% what their LMI costs.
Ask if they even know about it. Ask why they have it.
I’ll be surprised if they know. I’ll be surprised if they know how much.
NAB even makes out like this contrived policy is a benefit to you. They say:
‘LMI helps you buy a property faster with a smaller deposit by allowing you to borrow more than 80%.’
This is a little different to the UK’s PPI scandal. But not a lot different. And LMI is charged on home loans, so the premiums can be huge. We don’t know right now how much over the years Aussies have paid out in LMI premiums.
We’ll try find out. But our educated guess is it’s also in the billions.
And we’d love to find out on how many LMI policies banks have ever had to claim on. We hazard a guess to think it would be less than 1%. Maybe less than 0.1%. Maybe never at all.
LMI could be the Aussie version of PPI. It could be the biggest scandal to rock the Aussie banking world. It could cripple the banks. And it may blow up any day.
Editor, Secret Crypto Network