Even if all the 76 recommendations of the 'Banking Royal Commission' were to be implemented, not much would change.
There is a reason bank stock rallied after its release, bank board members and executives have little to fear.
A lot of the media scrutiny of the 'Banking Royal Commission' report has focused on the lack of criminal prosecutions of bank executives. Commissioner Kenneth Hayne reported 24 instances of potentially criminal conduct to ASIC for investigation, likely to be a lawyer fest taking many years, but unlikely to change behaviour.
The Commission's final report is otherwise an impressive document. Although as Hayne alludes to with the obtuse eloquence unique to his profession, he and his team could have benefited from more time. He does, however, make the point that finding solutions to the many issues raised is critical and urgent.
Much of the report does focus on the retail end of banking and finance — inevitable as 61per cent of the more than 10,000 submissions made to the Commission were banking related complaints.
Even without delving into the case studies, the report is dire reading about an industry, which, in Haynes words, is driven by greed:
"... the pursuit of short term profit at the expense of basic standards of honesty."
Coming from a man who has spent his entire adult life within the carefully confined words of the justice system, that is an explosive statement. But although mortgage brokers may differ on this point, the majority of recommendations are more practical than combustible.
Many are just plain common sense, such as these examples:
- the borrower, not the lender, should pay the mortgage broker;
- mortgage brokers should be considered financial advisers and subject to the same laws and regulations;
- financial advisers who are not independent must explicitly declare this to clients;
- no "hawking" of superannuation and insurance products — that is, no unsolicited cold calling;
- prepaid funeral services to be considered financial advice; and
- handling and settlement of insurance claims to be considered as financial services and regulated accordingly.
A common thread throughout the report is that financial advisers should be accountable to their customers and only to their customers, and that transparency and improved product disclosure need to be enforced.
In addition to improved customer protections, the report deals at length with remuneration practices. It calls for sweeping changes to force performance remuneration of front-line staff to no longer be based solely on sales performance but more on customer service and compliance measures.
A major failing of the report is how it skirts the issue of executive remuneration. There is much wordage around changing executive pay to better reflect compliance measures, accountability and culture, but no reference to the notion that bank executives are paid well beyond what the general community considers reasonable.
The dichotomy is the rationale commonly used by bank executives for their enormous pay packets is the risk they take in their high profile jobs. In reality, they are effectively shielded from any downside risk and handsomely rewarded for the up-side — and the bar is typically set low.
Currently, executive bonuses in the banks are based mainly on shareholder returns and (often nebulous) measures of customer satisfaction — typically seen as service in relation to competitors rather than independent measures of good service. It is doubtful that many big bank customers would suggest any of them are champions of service excellence.
Hayne does not mention "customer service" once in the report.
Culture is mentioned 282 times, so clearly that this is where Hayne and his colleagues see the problems. But they offer no real solutions except for mandatory reviews and more supervision and oversight.
There are, of course, no quick fixes to changing the culture of any business, let alone businesses with tens of thousands of employees. Even less so in a business sector that operates as a virtual oligopoly, protected by that most sacred cow, the "four pillars policy".
Four pillars (and our prudential regulations in general) is credited with everything that is good about the Australian banking system, including how Australia avoided the worst effects of the global financial crisis (GFC).
And while there is truth in that and our big four banks have rock-solid balance sheets, it ignores the issues around vertical integration of banking and retail financial services. Not being allowed to merge didn't mean that the big four weren't allowed to acquire smaller competitors and "downstream" retail operators — such as financial services firms, so-called wealth managers, mortgage broking aggregators and insurance companies. This integration made both the business of banking and their product offerings much more complex.
But the report does not talk much about product complexity — a source of not just customer frustration but the root cause of the GFC, financial engineering enabled by deregulation.
The report alludes to the causes of the GFC and recognises that not much has changed to prevent it from happening again. Remarkably, there is no mention whatsoever of the role of the auditors failing to hold the banks accountable, nor of the many representatives of accounting firms that sit on bank boards and the potential conflict of interest that this poses.
There is also no mention of how bank boards are made up entirely of people with financial, legal, accounting and business backgrounds, with the odd ex-politician thrown in for good (lobbying) measure. No consumer advocates, no employee representation, hardly an academic insight. (There is only one to be exact — at the CBA board which is also the only gender-balanced board).
These are the people that ultimately should be held accountable for the damning Royal Commission report. But with the exception (so far) of Ken Henry and Andrew Thorburn at NAB, they don't seem to see themselves as part of the problem.
And that is the real problem.
The next Federal Government must abandon the old policies set for a different time (including "four pillars" policy). It must recognise that vertical integration is not working well for customers, that being accountable only to shareholders leaves the customers stranded and understand that tomorrow's competitive landscape is very different.
It must be open to considering drastic measures, including:
- public and transparent scrutiny of all mergers and acquisitions relating to companies that handle people's money, at least over a certain (small) size;
- to extend the financial adviser licensing regime to all bank and finance company executives and mandate reporting of compliance failures;
- mandating rules for license suspension and loss due to non-compliance and misbehaviour;
- making failure to report compliance issues in a timely manner an indictable crime of not just the perpetrator(s) but also of their superiors;
- regulating for broader representation on bank boards that reflect community values and expectations, not just shareholder value;
- regulating for financial product and product disclosure in a manner that serves the consumer not just the black letter law obfuscation of the current system;
- comprehensively reviewing all aspects of the existing and fragmented regulatory regime with an aim to simplify, mandate and make transparent; and
- reviewing ways to mandate board and executive remuneration to better align with a broader set of objectives and better meet community expectations.
Bank boards and executives will, of course, cry foul at much of this, decrying excessive regulation in a free market economy. And in principle, they may be right. But decades of mismanagement, mistreating customers and free-wheeling greed proves that those same bankers don't deserve to operate in that market.
And if we can't change the people, as a free society, we have to change the rules.
Kim Wingerei is a former businessman turned writer and commentator, and author of ‘Why Democracy is Broken: A Blueprint for Change’. You can follow Kim on Twitter @kwingerei or on his website, kimwingerei.com.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License