We should beware the costs of smacking the banks

As vaudeville is to Shakespeare, the banking royal commission is to serious analysis of the financial services sector. Hopefully, when the showbiz comes to an end, there will be some measured examination of the true extent of the problems and possible remedies.

The commission hit a low last week wheeling out a blind pensioner who had gone guarantor for her daughter and her partner on a business loan that went bad. The pensioner admitted that she would have done anything for her child. She also had received legal advice. The daughter wasn’t called to the witness box. We don’t even know her name. But I guess that’s what commissioner Kenneth Hayne thinks is procedural fairness.

But what about the many thousands of instances in which parents went guarantor and there was no problem? This has enabled those children to access more ­credit than otherwise would be the case. It is of considerable benefit to them and parents are happy to help out.

Let’s not focus on exceptions, as they’re never a good basis for ­policy. And what has happened to the centrality of individual responsibility when it comes to commercial transactions? In the case of the so-called liar loans, it’s the borrower doing the lying — about ­income, expenses and the like. There can be some complicity by mortgage brokers. But if the blame lies anywhere it is with the people telling fibs, not the banks.

But here’s an important point: the default rate on residential mortgages is extraordinarily low and there has been no noticeable uptick in borrowers missing payments. Most are ahead with their payments and hold considerable buffers in their offset accounts.

There are scary predictions of financial pressures on borrowers should they be forced to move from interest-only loans to principal and interest ones. But given current interest rates, and the likelihood they will remain unchanged for some time, it’s easy to exaggerate the impact of this ­transition.

But what of the distressing tales of customers being treated badly by financial planners, including those employed by or associated with the banks? I’ve said it before, banking and financial planning have nothing in common. The first is mainly about assessing credit worthiness and risk, the second is essentially about sales. The cultures of the two are light years apart.

Having said this, does anyone bother to ask why so many Australians need to seek the services of ­financial planners?

It’s mainly because of our ill-considered superannuation system that strands retirees with lump sums but no ­capacity to invest the funds while complying with complex rules. In other words, it’s mainly the fault of pitiful government policy.

In countries with contributory social insurance arrangements — in many European countries and Canada, for instance — it’s common for low and middle-income retirees simply to receive ­income through government-mandated deemed products. ­Financial planning is only for high-income, sophisticated investors.

What’s beginning to happen is that the big banks will vacate ­financial planning and wealth management, leaving it to stand-alone firms and sole practitioners. Whether this will advantage ­consumers is another question. After all, a badly treated customer is likelier to be compensated by a big bank.

Consider also the vexed issue of small business lending by the banks. Such lending is risky and there is always a chance the bank will do its dough. It’s not surprising banks require some form of collateral before such loans are granted.

And the bleatings of Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (yes, there really is such a job), about banks behaving badly in ­respect of small business loans don’t negate the fact there are ­always two sides to the story. She gives only one.

A complication to any analysis of small-business lending is the failing franchise model in Australia. Traditionally, franchises were a successful basis for small business, with the corporate, marketing and product support from the central franchisor believed to be critical.

What appears to have happened is that franchisors, often ­aggregated into corporate groups themselves, have lost sight of the need for mutual gains for the model to succeed. Franchisors have become greedy, slack when it comes to process and have been all too happy to dud individual ­franchisees.

Mind you, this is not the fault of the banks. But there may be a case for governments to revisit the laws that apply to franchises as well as put pressure on franchisors to act in good faith when it comes to the businesses they control indirectly.

We also should remember consumers have woeful experiences with many big businesses, not just the banks — telecommunications, airlines, health insurance, energy. And what about dealing with ­government? Centrelink, the Australian Taxation Office, roads and traffic offices, births, deaths and marriages.

Let’s not excuse banks. Remun­eration levels for senior executives are obscene; some cus­tomers are mistreated; there is a widespread culture of covering up mistakes; and too many resources are devoted to trendy social causes.

But it’s important to interpret with considerable caution the sel­ective — cherry-picked, dare I say — evidence coming out of the royal commission.

The real danger is that the recommendations that could result from the commission may make the situation worse — costs will rise, credit will be rationed and the economy will sag. Those worst affected will be of limited means.

Since the royal commission, $13 billion has been wiped off the market capital of the big banks, the shares of which are widely held by retail investors — mums and dads. Bank shares are also an important part of the portfolios of most superannuation funds. As a result of demutualisation, AMP is also a stock with a large retail shareholder base.

Whatever the gains for individual bank customers may be in the future, the probably unnecessary financial pummelling of the banks has to be factored into the equation. And bear in mind the impact is not just local: overseas investors are taking considerable interest in these theatrical capers and reasses­sing Australia as an investment destination.

Ultimately, the best we can hope for is banks acting as efficient financial intermediaries providing transparent and quality services. Things still will go wrong occasionally, but if remedies are in place that would be a good outcome.

Bank bashing may be popular sport but there’s the possibility the bashers themselves will be the losers. In the short term, the main beneficiaries of the royal commission are the lawyers who are happily counting their millions.