Banking royal commission: O’Dwyer should admit she was wrong

Should the government just admit it was wrong to refuse a royal commission into the banks? Is it preferable simply to apologise by stating that the government had been working on incorrect assumptions about the extent of misconduct by the banks and other financial sector firms?

Revenue Minister Kelly O’Dwyer was doing a lot of ducking and weaving yesterday to avoid making these concessions. The government has been getting on with bringing the sector into line by introducing new regulations, imposing new standards on financial planners and increasing the budget of ASIC, she told us. Whether all this frenetic activity is well-targeted is, however, a moot point, particularly when it comes to customers getting a better deal.

The truth is that both Scott Morrison and O’Dwyer should have realised that when it comes to wealth management, the structural features of the industry lend themselves to bad behaviour. Conflicts of interest are essentially inherent when financial planners work for banks. Bankers and financial planners have about as much in common as giraffes and cactuses — that is, nothing. Bankers need to soberly assess the credit worthiness of clients and their proposals for debt funding. Financial planners are essentially salespeople, often with very little post-school education. One way or another, they seek to put clients into products and arrangements that financially benefit themselves rather than the clients. In the best-case scenarios, it’s win-win, but often times it’s not. In the worst-case scenarios, fraud and deception are involved. The only benefit of being a bank-employed financial planner’s client is a good chance of being compensated in those worst-case scenarios.

Of course, there is politics at play. By admitting the government was wrong to refuse to call a royal commission, it is conceding Labor was right to call for one. That Labor hadn’t finalised terms of reference is just a matter of detail.

And while the government is bragging about the broader scope of its royal commission to include the superannuation industry, it’s not clear there will be as much to find when it comes to industry super funds, largely because they don’t deal much with retirement incomes. As managers of accumulation super accounts, it’s unlikely that too much will emerge even if there are some problems in relation to insurance products foisted on members.

If the government decides saying sorry is the best strategy, it might be wise to roll another decision into the narrative, to scrap further rounds of company tax cuts beyond those legislated. If it was a hard call to convince voters before last week that cutting company tax for firms of all sizes would serve the national interest, it is near impossible now.

Just accept it won’t be possible to secure the numbers in the Senate, redirect the money applied to the exercise and move on. It would be sheer political madness to take the company tax cuts to the next election.