Until this month there were two main competing views on Australia’s banks. One, favored by the government and bankers, sees the “Big Four” banks – National Australia Bank (NAB) Commonwealth Bank of Australia (CBA), Westpac and Australia and New Zealand Banking Group (ANZ) – as the strong and credible financial underpinning of Australia’s long-running prosperity.
The other, advanced by the government’s political opponents, media and thousands of aggrieved customers, feel government protection has cosseted bad banking behavior and that the cozy oligopoly needs to be better regulated and perhaps even dismantled.
Many in the latter camp have lost their homes and livelihoods after being talked into dodgy investments they did not fully understand by unscrupulous financial advisers, some of whom reaped fat fees and commissions for their over-aggressive sales pitches.
That skepticism ultimately forced Prime Minister Malcolm Turnbull’s government into establishing a Royal Commission into banking practices, though much later than many had hoped. The opposition, led by the Labor and Green Parties, had campaigned for such a commission for the past 18 months.
Last week, the Royal Commission heard shocking testimony, including admissions that some customers had been charged for financial advice for a decade after they had died, and that others had been deliberately charged for no service, has shaken confidence in the banking sector and government.
Minister for Finance and Revenue Kelly O’Dwyer, who previously said the commission was an “inquiry looking for something to inquire about”, has since changed her tune as revelations of widespread misconduct and regulatory shortcomings come to light.
The government is now toying with the idea of extending the commission’s mandate for another year. Turnbull’s administration, in damage control mode, has unveiled plans to significantly increase penalties for corporate malfeasance and fraud.
Governance failures at some of the country’s elite financial institutions revealed in the commission’s hearings have already forced the departures of top financial executives. Others were previously under fire for alleged misconduct that is now being cast in an even dimmer light.
Last year, CBA chief Ian Narev said he would step down amid a money laundering compliance scandal that engulfed the bank. CBA executives played down the link between the scandal and Narev’s announced departure.
The commission’s revelations, meanwhile, has forced the resignation of the chief executive of AMP, a leading funds, insurance and financial advice company with a 170 year history as one of Australia’s most respected financial institutions outside of the “Big Four” banks.
Last week, AMP chief Craig Mellor fell on his sword by announcing his retirement at the end of the year after evidence presented to the Royal Commission revealed the company had charged clients for advice they never received and had then mislead the corporate regulator.
In another case, CBA, the country’s largest bank, had continued to charge dead people fees for advice for several years after they passed away, the commission heard.
The revelations have shaken Turnbull’s already wobbly coalition government with 2019 elections on the horizon. In 2016, Federal Treasurer Scott Morrison described calls for a Royal Commission into the banks as a “populist whinge.” In an about turn, last week he said bank executives could face jail time.
Still the government appears to be resisting a full judicial inquiry into the commission’s findings. The opposition is putting pressure on the government to hold such an inquiry.
“They’ve learnt absolutely nothing from all of the scandalous revelations that we’ve heard over the last little while in the Royal Commission,” said Jim Chalmers, the Labor Party’s shadow finance minister in speaking to ABC Television.
To be sure, it will take several years for this all to play out, but the revelations and debate could be the beginning of the end of the current government’s sanctioned banking cartel.
Under successive administrations, Australia has had a “Four Pillars” policy which protected the Big Four from foreign takeover, and from taking over or merging with each other. This sanctioned a banking system where the four largest institutions control around 80% of the market.
At the height of the global financial crisis in 2008, the government effectively rented its sovereign AAA credit rating to the banks so they could continue to borrow funds on global debt markets. It was, officials said at the time, a key reason why Australia weathered the financial storm relatively intact.
Ten years on, the Royal Commission provides a revealing post-script to that narrative, with some now suggesting over-protection prevented banks from the short term pain often needed to push through restructuring and reforms.
Instead, the “Four Pillars” policy allowed the “Big Four” to indulge on a decade-long spree gorging on smaller financial institutions. Not only did they swallow up smaller regional banks but they also came to dominate the country’s lucrative wealth management and financial advice industry.
Not only were the “Big Four” taking deposits and lending, they were manufacturing financial products and selling them under the guise of independent financial advice.
This dichotomy is at the root of the issue now under inquiry. The integrated “wealth management” model created a conflict of interest between product and advice which the Royal Commission’s evidence suggests can only be resolved by separating the two financial services, in a local variation of the Dodd Frank Act in the United States.
Earlier attempts to ban commissions and move the financial advice industry to a fee-only model were fiercely resisted by the banks, and their implementation now appears to have wholly failed judging by the evidence presented to the commission.
Given that failure, separating product and advice is the next logical solution, but doing so would require a major restructuring of the financial industry and would demand major resolve from the government.
There could also be hidden dangers in such a plan, and people who are urging a break-up of the big banks might one day question what they wished for.
Around 14 million Australians have pension funds which will hold shares in the banks, and several million hold bank shares as individuals. These are many of the same bank customers who have been fleeced by the bad advice on display in the Royal Commission.
If the government cracks down on the banks, the danger is that bank shares will fall, dividends will be cut and that will impact on the wealth of average Australians, particularly retirees.
In such a scenario, regulations around lending could become stricter, causing lending to dry up with follow-on effects on the housing market, business growth and the wider economy. Australia has not had a recession in 25 years, a fact advocates for the status quo frequently trot out.
So while breaking up the banks might create a healthier financial system in the long run, it could also cause short-term pain, not only to the banking industry put their customers.
There’s no doubt that some in the banking industry have behaved badly, many perhaps criminally so, but the wider danger is that by punishing a few wayward bankers the government risks punishing all Australians in the process.