Royal Commission Judgement and What It Means for Banks

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Not that long ago, we had our fence fixed.

A guy by the name of Tony came around.

Tony did a great job, he didn’t charge too much for the work and I got some material for Money Morning out of it.

Tony is semi-retired. Although I don’t think he’s more than 50 years old.

He’s a handyman on the side. He sets his own hours. He makes money when he wants.

It’s was a far better life than his 20-plus years as a banker.

I couldn’t resist talking to Tony about the Banking Royal Commission.

Nothing will change, Tony thought. They might get slapped with some fines and rules. But it’ll go back to how it’s always been.

From low level employees to higher ups, they’ll all be chasing the short-term incentives.

They’ll try to rack in more dollars, more business, so they can go home with a bigger pay cheque.

It was one of the reasons Tony decided to leave banking. He just didn’t like the short-term mentality.

It’s also why we see banks (many other industries do the same, you just don’t hear about it) do terrible things, like charge people for services they didn’t get or sell insurance to vulnerable customers.

We look at this today and rightly point out how disgusting it is.

To change it, all we might need is another look at incentive structures…

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The great banking shame

If you haven’t kept up with all the findings from the royal commission, here are a few of them…

We found out AMP charged customers for services they didn’t receive. Then they lied to ASIC about whether they provided those services or not.

At NAB they charged customers for services they didn’t receive too.

Wealth manager, IOOF got some really bad press during the inquiry. The Australian Financial Review (AFR) writes:

The case concerns a cash management trust and allegations IOOF used fund reserves to square investors after a botched payment.

APRA wrote to the company in September saying it had concerns with Mr Kelaher’s ability to manage conflicts and protect beneficiaries, saying he “seemed to demonstrate a failure to understand the covenants under the Superannuation Industry (Supervision) Act and the obligations of a trustee under trust law”.

The matter will return to court for a directions hearing on March 19.

Over at CBA, selling dubious insurance to help consumers pay their credit card in times of sickness, death, or unemployment came to the forefront.

The AFR continues:

Over the past 12 months, after 68 days of hearings, 130 witnesses and more than 10,000 public submissions, the royal commission has tabled a catalogue of breathtaking behaviour, providing plenty of drama, tears, and public outrage – and a mounting customer compensation bill.

It was only yesterday that we saw some of the recommendations from Commissioner Kenneth Hayne.

The AFR gives us a summarised version of the 951-page report:

The four pillars of the banking system will be unshaken by Commissioner Kenneth Hayne’s final report, which leaves the core businesses of the big four bruised, but not broken from a humiliating public inquiry.

The report stops well short of fears of forcibly separating banks from financial advice divisions or making narrow recommendations for how bankers are paid.

A key proposal to shake-up mortgage broker pay is even expected to further enshrine the dominance of the big four banks, and was the only one of the 76 changes to split the two major political parties.

‘…The report refers 24 cases to regulators for civil and potentially criminal breaches of the law. The federal government says the referrals can apply to individuals as well as companies putting executives at AMP, ANZ, CBA, NAB, IOOF, Suncorp, TAL and Allianz on notice.

Financial services businesses adjacent to the banks such as insurance companies, mortgage brokers, financial advisers and super funds stand poised to have longstanding business models up-ended by the report, with reforms that have the potential to render uneconomic those operating at the margins.

Right before the report was released, we saw pollies like Treasurer Josh Frydenberg and Prime Minister Scott Morrison come out with words.

The former said the government needs to do more to ensure competition and more credit creation.

Yeah, good luck with that one.

The Big Four Aussie banks control 80% of the home loan market and 85% of all other loans. Regulators have also given the big banks the luxury of self-calculating the riskiness of their home loans.

This means the Big Four can classify their loans as less risky, increasing their reserve of safe assets, allowing them to lend out even more.

What we need is not more regulations on big banks, we need less regulatory help for big banks…

Why local is better

Small isn’t always better. But it is when it comes to banking.

Local banks don’t care about creating a $200 million loan to BHP or CSL. They care about you and the businesses in your community.

Their aim is to service the local economy. That means local homebuyers and local businesses. The latter is probably the biggest advantage of a local bank, as it spurs local economic growth.

A side benefit is also their constant duty to make customers happy. Not only do local banks need to offer great rates, they need to make customers happy to bank with them.

Imagine a local bank does what the Big Four do…they charge for services they don’t provide and sell you products you don’t need.

Pretty soon, customers wake up and move their business to another bank.

Right now, they can’t do this with the Big Four’s strangle hold on the loan market. And that hold won’t loosen until regulators de-regulate banks (the Big Four are favoured by regulators).

And until that happens, maybe Tony will be right.

Banks will just get a slap on the hands and it will be business as usual in a matter of months.

Your friend,

Harje Ronngard,
Editor, Money Morning

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