Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
One rule for them, and one rule for the rest of us
- Why is everyone blaming the banks?
- Banks bad deeds ignored
- Free markets at work
- Us versus them?
- Two hours left
Today is the day.
At 4.30pm — after the stock markets closes — the findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry will be made public.
That means you and I, get to see what Kenneth Hayne, commissioner of the industry probe recommends. Exactly what sort of shake up Hayne thinks our banks need.
Of course, our politicians and selected other interested parties were already given access to the report.
The final report was delivered to Governor-General Peter Cosgrove on 31 January 2019.
Giving the pollies in Canberra a whole five days to work out how to spin it.
Already there’s plenty of guesses in the news as what banks will do to appease customers.
Some are assuming there’ll be legal actions against the banks and individual directors.
There’s even a fear spreading in day-to-day financial news that this report could ‘upend’ the banking system as we know it.
To most, the report is squarely taking aim at the banks, that they’re going to be punished…
But there’s a problem with that analysis.
Banks shouldering all the blame is not being able to see the forest for the trees…
Why is everyone blaming the banks?
Let the banking doom and gloom begin.
We’ve only got a few more hours left until we find out just what sort of trouble the banks are in.
According to The Age, both Prime Minister Scott Morrison and Treasurer Josh Fryndenberg are ‘poised to accept almost all the recommendations of the Hayne royal commission that is set to demand an overhaul of the nation’s banking, superannuation and financial advice industries’.
The big four bank stock prices are down less than 0.5% by lunch.
And, I don’t expect them to fall much further.
Because the negativity is already priced in.
Investors spent most of 2018 digesting the dirty banking deeds. We’re already prepared for the worst.
And I suspect for the rest of this week, most editorial will focus on the banks.
Which is infuriating.
Let me explain why.
Now, I’m not here to let the banks off the hook. However, banking is a business.
Not only that, but the key to a capitalist society is that businesses will always choose to make profits where there is the least resistance.
In other words, they look for ways to make money the easy way.
Banks bad deeds ignored
It shouldn’t be a surprise that our banks are giant lending machines. Out for a quick buck at the expense of customers.
Believe it or not, this is why we have financial regulation.
Regulatory bodies were established to reign in excessive profiteering to maintain financial integrity.
The problem is, the banks were able to enjoy two decades of rampant lending simply because they were allowed too.
And I’m not making this up.
Royal banking commissioner Hayne made early observations on this. Noting that the relationship between the banks and regulators APRA and ASIC were problematic.
In one preliminary report, Hayne said that there was already adequate legalisation in place, it’s just that inadequate inaction was taken. And when punishment was dished it, it ‘did not meet the seriousness of what had been done’.
Furthermore, Hayne has firmly said that additional legislation wouldn’t be necessary, as much of the misconduct banks got away with was already against the law.
Basically, a blind eye was turned.
With all of the information that came out in the hearings last year, banks could have already been punished.
Yet no action was taken.
Looks like it was one rule for the big four, worth a collective $3.6 trillion in assets…and another rule for the rest of the financial sector.
Free markets at work
We heard there were fraudulent loans issued, mortgage documents fudged, dead people chased for debts, and internal lending practices that saw people issued loans that couldn’t possibility be paid back.
Oh, and let’s not forget that front facing bank staff were encouraged to ‘upsell’ bank products, with a complete lack of regard for customers financial circumstances.
Acts, by the way, that ignores any Australian Financial Services Licence (AFSL) holder fiduciary obligation to their customers.
Yet they were prevalent throughout the industry.
Not only that, but bank bosses have literally been paid bonuses based on how much credit they supply to the Aussie economy.
The more credit they pump into an economy, the bigger the bank gets.
To boot, lending criteria is entirely ‘internal’ and ‘self-managed’ by banks (the free market at work, amirite?). Meaning they can alter a person’s suitability for a loan, on a whim.
It’s been a decade of loans getting bigger, deposits getting smaller, terms getting longer and interests rates getting lower.
All of which benefited the banks.
They became massive.
How massive? The big four had a total of $284 billion assets in 1998…that means they are now 12 times bigger in 20 years.
Aussie banks OWN Australia.
Bank CEOs got massive multimillion dollar bonuses on top of their multimillion dollar salaries for every year the bank grew.
Yet at no point was this considered a conflict of interest.
There is ample legislation in place to prevent this sort of profiteering.
But hey, people gotta make a buck right?
Us versus them?
The insight from the royal banking commission showed us this legislation was consistently ignored.
Lest we upset the balance of our fat banks.
More to the point, the toothless regulators have written lousy policies that give the appearance of market oversight. All while ignoring their own policies and allowing the big four to become the multitrillion dollar industry they are.
In addition to this, we must start questioning the regulators impartiality.
At the start of this year, the top brass of ASIC, Sean Hughes was reported to have had face to face conversation with two of the big banks, saying:
‘In the last days I’ve had sit-down conversations with two of the big bank CEOs and I can tell you I don’t think either walked away thinking it was all that friendly. I am not in this job to be liked or be a friend to anyone in the industry.’
It makes you wonder, doesn’t it?
I mean, why only two ‘big bank’ CEOs? What about the other two?
Furthermore, there’s a whole bunch of smaller banks, lenders and financial service providers that would have appreciated a face to face, personal conversation — one that would provide them with some insight into the minds of regulators going forward.
The entire statement from Hughes reinforces the special treatment for big, powerful trillion dollar establishments.
I’m sure Hughes thought his statement made it look like he and ASIC were taking the ‘tough stance’.
Not to me.
In my view, a statement like that reeks of collusion, and breeds further mistrust in the financial industry.
After all, only the big boys get one on one information. Leaving the rest of us to scramble through the news reports.
Two hours left
We don’t know what’s in the report. We’ll know more this afternoon after the markets close.
However, the fact remains that the report may have significant ‘home truths’ for the financial sector. The reality is, it’s up to our government to implement the changes.
Already the royal banking commission has proven that adequate legislation is in place. Further legislation being lobbed at the financial sector is not the answer. Genuine banking reform is.
Part of the genuine banking reform would include the big banks being proportionately reprimanded when they cross the line. That our regulators need to ensure it isn’t one rule for them and then one rule for the rest of us.
Given that it’s an election year, I suspect the government will put further regulation on the industry, rather than reprimand the regulatory bodies that should have been doing their job in the first place.
The biggest problem here, is that the government, the regulators and the banks alike profit from consumer ignorance.
It’s no wonder there is mistrust in the sector.
The big four banks were allowed to dupe customers in any manner possible…and it happened entirely under the noses of the powers that were meant to stop it.
The regulators ignored this gross financial negligence from the banks at our peril.
The banks were bad. But they were allowed to be.
And I’ll bet the media gets bogged down in regurgitating what the banks did — completely ignoring the people who allowed it happen.
Only two hours to go.
Until next time,