Banking Royal Commission: Five Things You Need to Know

How could the Banking Royal Commission impact you as a consumer? And what brought about the Commission? University of Sydney experts explain what you need to know about the interim report release.
Australia was beset by a series of scandals in the financial sector for over a decade until former Prime Minister Malcolm Turnbull established a Royal Commission in December 2017. Our experts help to understand what’s happened so far, and what to expect from the interim report due out later today.
1. What brought about the Banking Royal Commission?

Former Prime Minister Malcolm Turnbull appointed the Hon Kenneth Hayne AC QC as Commissioner. Starting with the ANZ Opes Prime Scandal in 2009 where the bank paid millions in settlement, a series of incidents involving Australia’s big four banks followed.

“When a small handful of large financial institutions are providing financial services and cross-selling to many retail customers within a domestic financial system, trust evaporates quickly when scandals hit again and again,” explains Associate Professor Eliza Wu, University of Sydney Business School.

The Royal Commission exposed the widespread failures to act in the best interest of members, explains Professor Susan Thorp, Univeristy of Sydney Business School, with “conflicting incentives operating on trustees and managers. These failures have included charging advice fees when no advice service was delivered and taking excessively long times to transfer members to low-cost default (MySuper) funds.”

Above all else what the Royal Commission has achieved is to humanise banking bastardry. Our erstwhile ‘ho-hum’ acceptance that while banks are likely ripping us off here and there, it’s just the price we pay for financial convenience and security, has been well and truly exposed as the self-delusion it is.

Professor David Kinley, Sydney Law School

2. What has happened so far?

There have been five public consultations, with 8,977 public submissions received of which 63 percent refer to the banking industry and the main nature of the dealings around personal finance.

The information-gathering over the past 10 months has revealed stories of everyday consumers involving bankruptcy, loss of family and even homelessness.

Associate Professor Eliza Wu said the key problems identified in the Commission are “concentrated in the consumer finance and superannuation services. When a small handful of large financial institutions are providing financial services and cross-selling to many retail customers within a domestic financial system, trust evaporates quickly when scandals hit again and again.”

3. How have consumers been affected and will there be fair recompense?

“So far the Royal Commission has shown consumers have lost faith and trust – rightly so – in the Australian financial system. Some of the biggest issues include the lack of transparency, regulation and competition,” says Associate Professor Shumi Akhtar, University of Sydney Business School.

However, Professor Gail Pearson, University of Sydney Business School, highlights a culture of blame has been perpetuated with “Consumers are the weaker party in transactions with financial services firms. We should hear less about consumers being responsible for reading disclosure documents and their own financial literacy and more about firms truly exercising duty and responsibility towards each individual consumer.”

“The inquiry’s lid-lifting on the breadth and depth of conniving practices buried in small print, or worse, deliberately hidden from customers by artful deception, has shocked Australians out of their complacency,” added Professor David Kinley, University of Sydney Law School.

4. How will the banking and finance sector authentically regain trust?

With threats of falling house values in Australia and potential for a second global financial crisis, there’s concern that already beleaguered households will continue to bear the brunt of the financial sector negligence.

Numerous areas need to be addressed by the whole sector argues Associate Professor Shumi Akhtar: “We need to improve disclosures and break down of fees for the superannuation funds. We need APRA and ASIC to have non-overlapping responsibilities for both Banking and Superannuation fund management.

It will take time for trust to be regained and compensation will go a long way in helping.

Associate Professor Shumi Akhtar

While Professor David Kinley believes the sector has to work hard to win back its customers and, more importantly, their trust: “This first line response has been predictable. What banks and other financial institutions do next, however, is what really matters. Fig-leaf reforms will not cut it with ordinary folk and our poll-driven politicians. ‘Putting people above profit’ sloganeering rings not only hollow these days, even decidedly deceitful.

It’s clear that governanance needs to be addressed and has figured highly in submissions to date. Says Professor Gail Pearson: “This is no longer a question of ‘culture’, nor a question of ‘restoring trust’. The financial institutions must fundamentally change the way they do business. They should reconsider their governance practices, eradicate conflicts of interest from top to bottom and reform their remuneration structures.”

5. What are the likely outcomes or recommendations from the interim report?

Professor Susan Thorp suggests that regulators need to act to disentangle conflicted incentives and ensure that trustees’ responsibilities to members are given first priority. “This will likely mean those who have failed in their duty are penalised,” she says, suggesting that punitive measures will likely be suggested by the Commissioner.

As Professor Gail Pearson goes on to say, “We need more competition in the financial services system on the basis of fair and dutiful treatment of consumers, and less on the basis of market share captured by the bad practices exposed in the Royal Commission.”

The remuneration and governance structures of our institutions need to be addressed, argues Associate Professor Eliza Wu.

“Australian financial institutions will have to work very hard to regain the trust of the public and to rebuild much goodwill with the ‘warts and all’ that have been uncovered as part of the Royal Commission into Misconduct in Banking, Superannuation and Financial Services industry. The remuneration structure and service charges within the financial services industry must change going forward to help to restore trust within the entire sector.”

“Australia has the world’s most profitable banks – but at whose expense? – has never been a more pertinent question, and a seriously adequate answer never more demanded,” concluded Professor David Kinley.

The Commissioner Hayne’s final report will be delivered on 1 February 2019.