Banks Behaving Badly
Greg Fraser, Senior Equity Analyst – 1st December 2017
The man in the street would say ‘they had it coming’ with regard to the announcement of a Royal Commission of Inquiry into Australia’s omnipotent banking sector.
Insurance claims that weren’t paid out1, money-laundering activity under the noses of branch staff2, dodgy manipulation of financial markets on trading room floors3 and chief executives on telephone salaries that appear unworldly to the average person4.
Pop along to any backyard barbeque and most folk will have a tale of woe about poor customer service or sneaky fees.
Banks are on the nose. Australia’s ‘four pillars’ banking sector is under attack.
It is abundantly clear, however, that this is a politically driven step as the current Federal Government finds itself under pressure on many things including the apparent poor corporate behaviour of the country’s largest financial institutions.
The already heavily regulated Australian bank sector is in a perpetual state of investigation.
In 2014, a comprehensive Financial Services Inquiry was completed and the past 10 years has seen around 50 reviews of the sector extracting some $6 billion of regulatory and compliance related expenditure from the banks to conform. There are 12 current reviews in process.
The political backflip from the Prime Minister to introduce this Royal Commission is a matter of expediency to circumvent a rogue National Party Senator whose own private member’s bill had been hijacked by the Greens and the Labor Party.
The Government’s terms of reference for the Royal Commission have supplanted the potentially disastrous agenda of the alternative. The terms of reference will focus on alleged misconduct within the industry and will cover not just the banks but the wealth managers, superannuation providers and insurance companies as well.
The inquiry will encapsulate the union-controlled Industry Superannuation Funds who clearly do not want any scrutiny of the management and rules of their very large funds.
The Government will also appoint the Commissioner, whereas the private member’s bill would have handed the choice to the political opposition – another potential minefield avoided.
It is clear the banks have become a pawn in a political mess brought on by the Constitutional crisis that has seen several MPs and Senators (from several Parties) removed from office on dual citizenship grounds. Two by-elections are underway that have weakened the Government’s numbers in the House of Representatives.
The Chairmen of the big four banks were sufficiently concerned about the uncertainty being caused by the situation that they collectively wrote to the Prime Minister for an inquiry to be created.
The Government has taken the course of action with the ‘least worst’ outcome, according to the Treasurer, by setting the terms of reference and appointing a Commissioner of their choice to a Royal Commission of Inquiry that the sector doesn’t want or need.
When the inquiry report is released on February 2019 (a draft can be released in September 2018), any action based on the findings will likely be tempered by the conciliatory stance of the Government.
The banking sector is arguably the most important private sector in the economy. Australia’s banks have achieved a status of being ‘unquestionably strong’ as prescribed by the Australian Prudential Regulatory Authority (APRA). It exceeds the international standards set by the Basel Accord.
It is not, however, the financial aspects of the sector that the Commission will be probing.
The existence of the Royal Commission and its report will hang heavily over the banking sector and perhaps beyond, depending on the findings. There will be many factions and grudge bearers hoping for the banks to get their just-desserts, and it is likely the RC will find fault somewhere in the system.
The banks are unlikely to come out of it smelling of roses.
There is little doubt that the banks understand their corporate behaviour has never been under greater scrutiny. How they adapt and amend their conduct will be a priority for each Board and management team. Perhaps they will be far less combative when dealing with customer complaints and maybe more responsive when mistakes are made. The cost of this adjustment will clearly place some additional pressure on earnings.
Shareholders have already acted by placing greater pressure on their Boards to ensure unquestionable conduct of senior management in particular.
Investors will simply have to endure the inquisition but it may also present opportunities to buy into the sector even before the whole process reaches a conclusion.
1&2 Reference to CBA – Use of outdated definition of insurance payout buried in the fine print of its policy documents and the Austrac investigation on ATM transactions.
3&4 Reference to bank behaviour and manipulation of BBSW (Bank Bill Reference rate)