What is the Banking Royal Commission
To most, the Banking Royal Commission is a boring combination of politics, finance and economics. But make no mistake, the Royal Commission into Banking will ultimately affect your life in one way or another, potentially good or bad.
So the brain’s trust at Ocean Edge Finance are going to attempt the impossible and provide a snapshot designed to make the Royal Commission (RC) sound at-least slightly interesting. In doing so, it is hoped you will get a basic understanding of how you will be affected by the decisions that will ultimately come out of the RC.
How long does the Royal Commission go for?
We’re currently half-way through the RC. It’s just over a year-long process that started in December, last year, with an interim report to be handed down by 30 September this year, and a final report tabled on February 1, 2019. That said, some politicians believe the RC is too short and are pushing for an extension.
What does the Royal Commission do?
The most important piece of information to know in this regard is the RC cannot create laws, regulations or policies. All the RC can do is make recommendations. From there, it’s up to the politicians to work out which of these recommendations need to be legislated. With an election year next year, a hostile senate and the health of the economy perilously hanging at the whim of the RC’s recommendations, don’t expect too many laws to be passed any time soon. But when they do finally get passed, expect there to be changes to lending practices.
Interestingly, on the home page of the RC’s website, it clearly states, “the Royal Commission has become aware that some people may have been receiving information that the Commission can make a decision to refund investors or provided compensation. Such claims are not correct. The Commission cannot resolve individual disputes. It cannot fix or award compensation or make orders requiring a party to a dispute to take or not to take any action.”
How the Banking Royal Commission may actually effect the banks.
It’s at about this point, it’s vital you’re aware as to the very basic fundamentals of the roles banks play in our lives. Yes, they’re easy to bash and given their insane profits combined with deplorable behaviour, it’s easy to see why they’re on the nose with the Australian public.
But as former Australian Treasurer, Peter Costello, once said, “the only thing worse than a profitable bank, is an unprofitable bank.” At their core, banks provide the ability for people to purchase an expensive item now, such as a house or car, that would otherwise take years, even decades, to transact. Make no mistake about it, without banks providing this service the Australian economy would be in peril. And no matter how badly the banks behave, no political party or Prime Minister wants a recession on their CV given Australia holds the record for the longest run of uninterrupted growth in the developed world, being recession-free now for nearly 27 years.
There is a fine balancing act between correcting badly behaving, record profit-producing lending institutions versus the maintenance of a strong, vibrant and growing economy.
The people in charge of the Banking Royal Commission
The bloke at the helm of straightening the banks up is the RC’s Commissioner, the Honourable Kenneth Hayne AC QC. He’s a retired QC and Victorian Supreme Court judge with an Order of Australia. He has five people assisting him, known as Counsel Assisting, the main player being Rowena Orr QC.
It’s important to note the official title of the Commission is the ‘Royal Commission into the Banking, Superannuation and Financial Services Industry’. The reason this is important is it’s not only the banks under the spotlight, but other institutions and businesses, including financial planners and mortgage brokers, who will also be held to account by the RC.
What areas will the Banking Royal Commission Cover
If you want the full details on what the commission will cover you can visit their website at: https://financialservices.royalcommission.gov.au/Pages/default.aspx
So far there have been three public hearings:
• Round 1 in March ‘18 – consumer lending practices;
• Round 2 in April ‘18 – financial advice;
• Round 3 in May ‘18 – lending to small and medium enterprises (SME’s)
There is another round, commencing on 25 June:
• Round 4 in June ‘18 – farming finance, natural disaster insurance and financial services interactions between Aboriginal and Torres Strait Islander people.
What has happened so far
As a snapshot, Round 1 well and truly went to the RC, with the banks and mortgage brokers looking like greedy fat cats with absolutely no regard for the customer’s best interests. Lack of process, accountability and oversight were exposed. At its core, banks and brokers were allegedly undercutting customer’s living expenses in order to improve their servicing position, which allowed customers to lend more money than they could afford to repay. As a result, commission structures for mortgage brokers, and incentives for bankers, came under the spotlight.
If the banks thought Round 1 was a body-blow, Round 2 was an absolute blood bath with the RC delivering a stinging retribution of the bank’s financial planning interests. Known as banking’s black week, Round 2 revealed truly shocking, deeply disturbing and heartbreaking admissions. Bank’s financial arms admitted to lying to the financial services regulator, charging deceased customers fees and forcing customers to pay fees for no service.
Off the back of Round 2, the government raised the maximum jail term for individuals from five to 10 years based on criminal and civil penalties for corporate misconduct. This increase was one of the most significant in more than 20 years.
Such was the depth and breadth of the RC’s decimation of the bank’s practices in Round 2 the Liberal Party had to publically apologise to the people of Australia and the Labor Party for not calling the RC sooner. The years of anecdotal evidence was finally proven to be true and the unrest had vindicated.
Once Round 3 arrived the banks were understandably cautious. And it didn’t start well for them with a disabled, nearly-blind and severely ill pensioner giving evidence based on her nearly losing her home based on going guarantor to assist her daughter secure a loan to start a small business.
Whilst the story was heartbreaking, the bank’s processes were proven to be rigorous, inclusive of insisting the complainant seek independent legal advice. It’s at this point the underlying motive of the RC lost some of it’s impetus. Yes, the banks absolutely needed to be held accountable, but at what point does the customer need to take responsibility for his or her actions? It seems the RC found that line in Round 3.
With the Round 4 to start shortly, what can we assert now from the first half of the RC? How will the findings of the RC affect you? Following is how it looks so far:
• Increased red tape in applying for a loan;
• Far more rigour around determining living expenses when applying for a loan;
• Extra scrutiny around determining income;
• Customers with below average income can expect significant challenges in gaining approval for a loan;
• Customers with a current loan will potentially be trapped and unable to switch to a better interest rate loan product based on new servicing criteria;
• Independent legal advice will increasingly form part of the loan approval process;
• Banks to divest of their financial planning arms to avoid current conflicts.
What will happen after the Banking Royal Commission
Whilst the efforts of the RC will ultimately see better customer-based outcomes, which is a good thing, the balance will be ensuring the industry is not over-regulated to point of a self-imposed credit crunch. The latter would potentially see a recession, increased unemployment, bankruptcies and litany of financial hardship across the country
We will be watching the rest of the RC closely to get a window into the future of banking in the Australian market and be sure to keep you up-to-date with its findings.
To find out more about how the Royal Commission may affect you Ocean Edge Finance is here to help. Feel free to call us on (08) 9319 2850, or drop into our office at Unit 2 / 8 Silas Street, East Fremantle. For further information see www.oceanedge.com.au