Terry McCrann: Time for reform, not shackling of banks after royal commission

TOO much regulation, even if it “works”, can do more harm to bank customers than good — what we need is smart reform, writes Terry McCrann.

Australia's banks need reform following the royal commission. Picture: AAP Image/Joel Carrett

OBVIOUSLY, the really big thing to come out of especially this last week of the Banking Royal Commission is that we all have to learn from it: bankers, regulators, politicians and lawmakers, and importantly, also customers.

And indeed, I’d add observers and commentators.

We’ll come back to that, but first things first. What first needs to happen is compensation to victims where appropriate and punishment to the wrongdoers — from the institutions themselves down through boards of directors, CEOs and executive management and down to the actual miscreants at the coalface.

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That punishment can and should take one of two forms — punishment by an external regulatory or legal body and a variety of internal sanctions, such as loss of bonuses, salary cuts, demotions and indeed employment termination.

In many cases this is already underway or should have been underway. Most of the bad behaviour that’s hit the front pages and TV bulletins this last week was, strictly speaking, “old” news.

The RC doesn’t have teams of investigators rooting out misbehaviour; what we’ve seen have mostly been cases that have already been litigated either by a bank itself with customers or in interaction with a regulator.

Arguably, in many cases both unsatisfactorily and with little evidence of the bank or financial institution “learning” from what it did wrong.

The first big overarching lesson for everyone to learn is not to expect, far less should we aim for ensuring, that nobody ever again will be badly dealt with by a bank.

If you think that’s possible, you really should take up residence in Fantasyland. Aside from the fact that people are human, they are greedy — both customers and banks, they make mistakes, systems are imperfect.

Too much regulation, even if it “works” can do more harm — do more harm to bank customers — than good.

There’s as much a regulation risk-reward trade-off as there is with investments. I’m not trying to sneak in the back door an argument for “let’s just keep going as we are” — sure, make a bit of noise, harvest a few scalps but go back to business as usual and customers should just cop it. Absolutely not.

After this there is no “back to business as usual”. But what we need is “smart” reform.

Banks must learn that they have to be banks, and nothing else. Picture: iStock.

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That’s reform which works, which sustains the vital role that financial institutions play in our lives (and that means enabling them to make reasonable profits) and at the same time ensures they actually deliver to customers.

I certainly don’t have a nice package to lay out. I would caution against seeing more and more proscriptive and punitive regulation as the answer. Without being starry eyed, it’s best if businesses do the right thing because they want to.

The one big thing the four big banks have to learn is that they have to be banks and only banks. The biggest problems they have got into — and where they have most hurt customers — is in non-bank areas of financial advice and investment.

This is what’s been on such searing show this past week — as against the first two weeks which were focused on actual lending.

The banks’ moves into financial advice, insurance and investment management were driven by a belief that there was easy money to be made by gaining a greater “share of wallet”.

I well remember profit presentations where the increase in the number of “products per customer” took pride of place.

Staff employment incentives were structured around getting customers to add various insurance products to a home loan.

Sure, it can and should remain basic for bank staff to guide customers into financial products which are to their benefit. But that should be at arm’s length, both for the staff member and the bank.

In essence, the banks have to fix themselves.

You need the broader incentives — and potential punishments — to provide the incentive to do that.

But that also means that customers in the broad will have to understand that financial services don’t come for free. Getting rid of the conflicts which blurred where exactly the payments were extracted will mean paying upfront and directly for each component of service.

We all mouth motherhood statements about “transparency”, but often we don’t then like what we get to “see” (and pay for).

A key objective of the “learning” and what flows from it is to promote real and effective competition.

I’d suggest we’ve been looking for the supposed lack of competition in the wrong place. It’s not been in home loans, where we’ve been obsessing over perceived interest rate rip-offs, but precisely in all those non-bank services around the $2 trillion-plus of superannuation money sloshing around.

The cases where people have paid for financial advice when they weren’t getting it are trivial compared to the billions paid each year for “advice” that is real enough but frankly adds nothing.

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