Well, that was an anti-climax.
After all those months of testimony, cross-examination, and headlines, the Royal Commission into the financial services industry found a lot to dislike… but not a lot to change.
Yes, bad people did some bad things. Fees for no service. Shockingly inappropriate financial advice. Awful treatment of rural borrowers. There'll likely be civil prosecutions to come from the report, and the possibility of criminal penalties.
But, little change.
Commissioner Kenneth Hayne has called for ASIC and APRA, the two regulators, to be more stringent in their enforcement, and more aggressive in pursuing wrongdoing through the courts. He's recommended that financial planners declare their lack of independence. And much more, contained in a thick report which makes 76 different recommendations.
Somewhat surprisingly, despite all of the wrongdoing alleged to have been carried out (and some of it admitted to) by the big banks, little real change is recommended.
Mortgage brokers, instead, will cop the brunt of the Commission's report. It recommends that brokers no longer receive trailing commissions from loans they help originate, and — most impactfully — that fees be paid not by the lender as they are now, but by the borrower.
I don't know about you, but I don't recall the most egregious examples coming from the broking sector.
These are the allegations I remember:
I remember bank-owned insurers writing poor policies and trying not to pay claims.
I remember banks charging fees to dead people
I remember financial planners recommending their own products, to the detriment of consumers
I remember apologies, bad memories, questionable justifications, and obstinacy.
And I remember, almost a year ago to the day, an ASIC report that said bank-owned or -controlled planners put 68% of client money in that bank's products, when they only represented 25% of the options.
…allegedly.
To be fair, I'm not a member of the judiciary. I haven't devoted anything like the time that Commissioner Hayne has, to the issues raised, and the potential solutions.
Still, I can't help but feel that he missed a golden opportunity.
Never waste a good crisis, they say… and this was the very definition of a great one.
I'm surprised that Commissioner Hayne believes a disclosure of non-independence is preferable to actually mandating that independence, through separation.
I'm surprised that incentives weren't more fully excoriated.
Given everything we've seen — and that he took the nuclear option on mortgage broking — I'm surprised he didn't take the most obviously clear-cut solution. He could have made just one recommendation:
"The only person who should pay a planner, insurer or broker is the client"
In 14 words, both the spirit and letter of the issue would be neatly dealt with. No conflicts, no questions, no disclosures required.
(And before you start thinking my approach is self-serving, it's actually the opposite: right now, The Motley Fool is in the minority, and we stand out by being different — and better. If the industry was held to the standard I suggest, we'd have one less — big — point of difference.)
Maybe Commissioner Hayne was worried about the impact on the financial services sector, were he to recommend more sweeping changes. Maybe he feels that the public shame will see bankers change their ways. Or maybe he's pinning his hopes on a chastised and reinvigorated ASIC, which should be out to prove it can keep the banks honest.
Whatever the motivation, you only have to look at share price movements to see what the market thinks of the report. Bank share prices were up between 3.9% and 7.6% today. The popular narrative is that the spike was caused by 'short covering'. That's likely part of the story, but my money says the reason is far more prosaic: investors had expected the Royal Commission to make recommendations that would have materially impacted bank profitability.
In the event, either investors were too pessimistic in the past, or Commissioner Hayne was too gentle. Put me down for the latter.
Bank share prices were deservedly higher today. Mortgage broker shares are similarly deservedly lower. Few expected such bad news for brokers and such good news for bankers.
In the fullness of time, we'll see what the current and prospective governments are likely to do. The current government is 'taking action' on all 76 recommendations, according to the Federal Treasurer, with only the change to 'who pays the broker' looking shaky. The would-be government, favoured to take office by both the polls and the betting markets — had already promised to implement all of the recommendations, sight unseen.
If so, the regulatory coast now seems clear for the banks. Yes, there'll be future court cases relating to past misdeeds. And the banks' C-suites will be taking compliance more seriously than they have in years. 'Provisions' will be made in the financial accounts.
But they'll be minor, if public, annoyances, and the banks are clear to go on their (only slightly adjusted) merry ways.
As for shareholders, the focus returns to the future: to house price growth, credit growth and cost control. None of which is a slam dunk, but that, too, seems to be largely factored into bank share prices.
Well, as long as bad debts don't rise too far, too fast. And there are no more skeletons in the closet. Still, bank bosses likely slept better last night than they had in months.
Now, it's over to ASIC. And more power to their arms. I hope they become a regulator the banks both fear and respect. As it should be.
Let's hope history doesn't mark this report as a missed opportunity for real reform. And that the economy — and credit — continue to grow.
Fool on!
Scott Phillips
Chief Investment Officer
Motley Fool Australia
