End of an investment era as banks run scared

A paradigm shift has occurred in our attitude to financial services and betting on the banks will never be the same again.

Broken piggy bank with band aids on desk.

It is becoming increasingly apparent that investors looking for a return to the “good old days” in Australian banking are going to be disappointed.

The events over the last year, led by the banking royal commission, mean that bank investment will never be the same again.

I guess we have all known that banking would change fundamentally as scandal after scandal was uncovered but the magnitude of change really came home to me this week when a reader (who is known to me) revealed he has received a letter from the CBA Private Bank offering a “refund” for a significant amount of money.

The CBA bank believed the bank had NOT provided an annual review service which was supposed to be provided as part of an advice fee.

The reader explained that he had no idea he was paying an advice fee, and certainly had no idea that he was meant to receive an annual review.

In this case the matter dates back over nine years and CBA is offering to recompense the amount debited to my reader plus interest, at the cash rate plus six per cent. This is an enormous penalty and will cost the CBA large sums.

Cast your mind back a few years and recall how hard it was for victims of the Storm Financial disaster to extract money from the CBA. Now compensation money plus big penalties is being passed on to clients who had no idea that they required compensation and indeed are grateful they never received CBA advice. What we are witnessing is a trashing of the bank brands.

And to me this latest action not only shows the political pressure the banks are under but confirms that they are running scared over what might happen when the royal commission announces what could be disastrous findings for the banks and AMP, on the basis of the evidence we have so far seen.

There is a real danger that the politicians will compete to show who is toughest on the banks. Already the regulators are expected to exercise much greater supervision over bank decisions.

APRA is clamping the amount and terms of investor loans, the conflicts of interest are forcing the banks to separate their investment product production arms so that spin-offs are planned out of CBA and NAB.

The CBA has paid $700m in fines for breaches of the anti-money laundering and anti-terrorism financing rules as a result of a break down in their systems and there are now rules for fair overdraft documents for small business lending.

Housing has been a boom area for bank profits and they have run down their skills in business lending. But home lending not only faces the APRA restrictions but new rules on commissions and fees plus the looming ALP negative gearing restrictions and capital gains changes should there be a change in government.

Meanwhile, global investment giant UBS say that the banks have hidden problems in their loan books, which will be exposed if dwelling prices keep falling in Sydney, Melbourne and Brisbane.

And it keeps coming. The new maximum criminal penalty proposed for bank executives (and others) will be 10 years behind bars for individuals and fines the greater of a $945,000 fine or three times the benefit gained or loss avoided.

The fines are big but banks globally (and unions) see fines as a cost of doing business but the thought of ten years behind bars really frightens bank executives and their families. The profit motive is suddenly relegated.

And banks made large sums, not only from grossly unfair small lending rules but also from credit card rip offs. Now a whole code of conduct has been introduced which will make banking much less profitable especially as those who behave badly know they will be jailed.

I think the new AMP chairman David Murray is right in raising the warning flag that directors are being sucked into management roles because of the onerous obligations being placed on them.

But given the royal commission we are almost certain to go the other way and bank boards will need to work even harder on the detail given that jail time now hangs over their head.

All this is happening at a time when operationally banks are facing challenges they have never seen before. Already we are seeing a raft of small financial institutions emerge to lend for housing purchases and to business.

Banks have deposit rates so low that many prosperous families are prepared to offer deposits to the newcomers if the rates offered are attractive. And these organisations have no legacy computer systems and tap the latest technology. They do not have the same capital restrictions and rules as banks so their costs are much lower.

And then there is a new world of payments coming via mobile phones and block chain-related technologies. Banks are going to need to be very agile if they want to play a significant role in this new world.

But as we have seen in media and retail it isn’t easy for any organisation, let alone banks under pressure, to foster new technology enterprises that embrace the new models and attack the highly profitable existing way of trading. It is left to others to disrupt.

Such situations require clear thinking boards that are not bogged down in management detail. But that’s not the immediate future for banks.