We’ll have to wait to see the heads on the guillotine floor

Royal commissioner Ken Hayne has unsheathed the cutlass and given the financial services industry a well-deserved hammering.

Royal commissioner Ken Hayne has unsheathed the cutlass and given the financial services industry a well-deserved hammering.

Greedy banks, timid regulators, endemic conflicts of interest, bloated remuneration, appalling governance lapses, new lines of profitable business like charging fees to the dead … it was all there in gory detail.

In fact, the only vested interest spared was the customer, in whose name the entire royal commission exercise was conceived.

Such was the brutality of Hayne’s 1000-page treatise that its inconclusive end, with heads still connected to bodies instead of rolling on the guillotine floor, was anticlimactic. That’s about the best news that the banks can take away from the interim report.

Instead of rushing to judgment on individuals and policy recommendations, Hayne has saved all that for his final report, due by next February.

There was a real fear in some institutions that recommendations would be made in relation to individuals and policies, despite a July press release from the royal commission that said the report would confine itself to “policy-related issues”.

The concern was probably a reflection of the extraordinary momentum that the royal commission has generated by bringing banking misconduct into the nation’s loungerooms.

Fees-for-no-service, which nicely encapsulated the activity in question and had been under investigation by ASIC, was rebranded by Hayne as theft.

Suddenly, everyone understood what the hell had been going on.

It’s important that Hayne has paused for breath before pumping out policy recommendations.

The danger of unintended consequences is real, and the commissioner will want to do everything he can to minimise the risk.

Annualised housing credit growth is already at a five-year low of 5.4 per cent, as banks anticipate Hayne’s findings on responsible lending and kick off the crackdown themselves.

Prices are retreating as well, down 2.8 per cent year-on-year.

While talk of a credit crunch was not so long ago dismissed as hyperbole, it now appears to be playing out; it’s just a question of degree, with a Labor victory in next year’s federal election likely to usher in negative gearing and capital gains tax reforms.

The break will allow Hayne to make thoughtful recommendations. He will also hear from the major bank bosses in the royal commission’s final, November round of hearings. None of that, however, detracts from the sheer force of yesterday’s interim report.

It’s hard to recall a more damaging analysis of one of the nation’s critical industries.

Sure, there was the HIH Insurance royal commission in 2003, but it was largely confined to a single rogue company.

Hayne made the point yesterday that APRA had commissioned a prudential inquiry into Commonwealth Bank’s culture because there had been so many incidents in CBA’s recent history that had “damaged its reputation”.

But where was the regulator when other entities had engaged in similar behaviour to CBA?

“The conduct suggests there that there has been insufficient attention given within those entities to regulatory and compliance risk,” Hayne said. “It suggests want of attention by those entities to reputational risk. Some of the conduct suggests want of proper governance in the entity.”

In this context, his language was positively restrained.

His predisposition to cut to the chase was evident elsewhere.

While others have reached a dead-end when exploring misconduct, the commissioner said the misconduct identified could be described “simply”.

First, there was taking a customer’s money when there was no entitlement to it.

Second, personal financial interests were preferred to those of the customer.

Third, the customer was misled or deceived.

And fourth, some specific requirement of the law was broken, such as the consumer lending provisions of the National Consumer Credit Protection Act.

So how and why did the whole sorry saga happen? There’s an easy answer to that as well.

Too often, the answer was greed, or the pursuit of short-term profit at the expense of basic standards of honesty, Hayne said.

“How else is charging continuing advice fees to the dead to be explained?” Hayne asked.

Also, over time, selling products and services became the focus of the banks’ attention; too often it was their sole focus of attention.

Products and services multiplied, as banks searched for their share of the “customer’s wallet”.

Then came the distorting impact of incentives.

“From the executive suite to the frontline, staff were measured and rewarded by reference to profit and sales,” Hayne said.

So there you have it — the reasons behind the mushrooming crisis in global banking distilled into a couple of paragraphs.

There’s a further 999 pages to absorb, but it’s probably best left to the policymakers.