Banking Royal Commission: Why bank executives fought so hard to stop inquiry

Scandals brought to light at the banking royal commission reveal why the industry fought the inquiry tooth and nail.

AMP executive Anthony Jack Regan leaves the banking royal commission in Melbourne. (Stuart McEvoy/The Australian)

Think back ... just how hard did senior financial executives fight against a royal commission?

Entering the second phase of hearings we now realise that bad behaviour and a shocking disregard for customers’ interests is not confined to the big banks. AMP, one of the most respected names in the wealth industry has admitted to charging thousand of customers for financial advice services they did not receive ... and then misleading the corporate regulator about it.

Yet, as the inquiry became inevitable at the tail end of last year, senior executives went so far as to suggest the international reputation of Australia Inc would be at risk if we had to endure an expensive regulatory clampdown.

June 26, 2014

Royal Commission timeline

The Senate economics committee calls for a royal commission following a lengthy inquiry into ASIC’s performance that focused on financial planning scandals at the CBA.

April 21, 2016

Royal Commission timeline

In an attempt to stave off continuing calls for a royal commission, the Australian Bankers Association announces former senior public servant Ian McPhee will oversee an overhaul of industry standards and practices.

November 30, 2017

Royal Commission timeline

After years of denying a royal commission is needed, the banks write to Prime Minister Malcolm Turnbull asking for one. He obliges.

February 12, 2018

Royal Commission timeline

Commissioner Kenneth Hayne formally opens the inquiry and sets the tone by laying into the big banks for failing to provide all the information he wanted in time.

March 13, 2018

Royal Commission timeline

The commission’s first full public hearings hear about consumer credit issues including a home loan fraud ring among NAB bankers in Western Sydney and out-of-control mortgage brokers at CBA subsidiary Aussie Home Loans.

April 16, 2018

Royal Commission timeline

Second round of hearings kicks off with a focus on one of the industry’s most scandal-prone sectors, financial planning.

Lindsay Maxsted, the chairman of Westpac, said it would be “dangerous” to have a Royal Commission — “What sort of signal does that send to the rest of the world?” he asked late last year.

Ian Narev, the recently departed CEO of Commonwealth Bank, joined in around the same time with a statement that politicians and jurists too would be admitting the failure of previous inquires if the Royal Commission went ahead.

Well, now we know why these executives were so desperate, the scandals are wider and deeper than anyone might have expected.

The royal commission has proved already no amount of Senate hearings or “internal reviews” — where senior management may loom over timid examinations of misbehaviour — can match a full blown inquiry run by fully empowered legal experts.

Not only do we see how banks and insurers operate but the exceptional legal powers of the commission means we get to see internal correspondence — the very cogs and wheels of the forces that run Australia

Banking Royal Commission

What it means for the banks

Opposed by the banks right up until the moment they asked for it in November, the commission presents both obvious dangers and hidden opportunities to the sector.

Their already-battered public reputations have taken further hits and commissioner Kenneth Hayne has mulled the prospect of tighter regulation.

Some of the worst areas exposed by the commission so far - particularly the commissions paid to car dealers and mortgage brokers - are areas where some banks would like to see a crackdown, but lack the guts to take action that would put them in danger of losing market share.

New regulations cutting mortgage broker commissions, for example, would allow the banks to compete on a level playing field while crushing an industry they have allowed to steal away half of all home loan sales.

It is early days but there are three takeaways for investors from the inquiry so far.

It is no use depending on laws if they are not enforced.

The arrival of so called FoFa (Future of Financial Advice) reforms were seen as a breakthrough, but if they are not implemented thoroughly then they have limited effect.

Higher compliance costs do not lead to better outcomes.

The banks and leading financial institutions constantly complain — with some justification — that compliance costs are onerous. But rising compliance costs have not stopped the litany of scandals unfolding by the day.

You can never be completely protected from bad behaviour or poor advice — active investors will always, to some degree, have to make judgments on their own behalf.

Yes, an inquiry of this depth is an imposition on business — and shareholders will pay for this extended deliberation on banking practice.

But investors may as well face up to facts, sooner or later bad behaviour in listed companies such as the big banks and AMP comes at a price to shareholders — the only question is how long it takes to break out into the public sphere.

The big four banks make up more than 30 per cent of the ASX by market capitalisation. For many retail shareholders who have sought out bank stocks for income the proportion of bank investments in their wider share portfolio may be even higher: As the ASX finished flat, AMP shares slid more than 4 per cent, joining the big four banks stocks as the spectre of higher compliance costs raises its head.