Prime Minister announces Royal Commission on financial services

| November 30, 2017

At the behest of the ‘big four’ banks, Prime Minister Malcolm Turnbull has announced plans for a year long inquiry into Australia’s much criticised banking and financial services sector in a bid to end ‘months of uncertainty’.

The speculation about an inquiry cannot go on,” Mr Turnbull said in announcing the abrupt policy about turn. “It’s moving into dangerous territory where some of the proposals being put forward have the potential, seriously, to damage some of our most important institutions.”

Jump before you are pushed

After months of intensive lobbying against an inquiry as an unwarrented and costly distraction, despite mounting political pressure for action after a string of industry scandals, the heads of the Commonwealth Bank, Westpac, National Australia Bank and ANZ Banking Group requested a “properly constituted inquiry” into the sector in an email sent on Thursday to Treasurer Scott Morrison.

The banks’ letter said an inquiry was now “imperative” as continued uncertainty was “hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people.” The email was signed by ANZ chairman David Gonski and chief executive Shayne Elliott, CBA chairman Catherine Livingstone and CEO Ian Narev, NAB chairman Ken Henry and CEO Andrew Thorburn, and Westpac chairman Lindsay Maxsted and CEO Brian Hartzer.

Shares in the major banks faltered in the wake of the announcement with CBA shares down 2.6%, Westpac 2.06%, ANZ 1.6% and NAB 1.7% in early trading.

Mr Morrison said the Royal Commission would report by Feburary 2019 and was “regrettable but necessary action to take control” and overcome the “damage” to the financial sector that had been done by repeated calls for an official investigation. Mr Turnbull had previously repudiated calls from Labor, the Greens and rebellious National M.P.s for an inquiry on numerous occasions.

Opposition Leader Bill Shorten said Mr Turnbull had spent 601 days fighting Labor’s call for a royal commission. “It says everything about Turnbull’s values and priorities that he only agreed to Labor’s royal commission when the banks told him he had to,” he said in a statement. “He ignored the pleas of families and small businesses, he rejected the words of whistle-blowers. But when the big banks wrote him a letter, he folded the same day. “Turnbull has always been – and always will be – on the side of the banks.”

Terms and Conditions

The commission will cost $75 million – about $25 million less than the same-sex marriage postal survey but $20 million more than the commission proposed by Labor. Its terms of reference appear to be broader and less specific than those which were recently proposed by the O’Sullivan bill and backed by the Greens.

The new royal commission will investigate all cases of “misconduct” in the insurance, banking and superannuation services sector, including breaches of professional standards rather than merely “illegal and unethical” practices. It will take account of “any conduct, practices, behaviour or business activity that falls below community standards” and “the use of superannuation that is otherwise not in the best interest of members”.

Union bosses could therefore be forced to give evidence, as industry super funds run by union executives have been criticised for the ways they spend their members superannuation savings. However the commission will not have the power to give victims of misconduct a path to compensation, creating at least a year-long delay on reparations for affected businesses or consumers.

“I want to make this very clear, a royal commission will not be able to recommend comprehension for individual cases, but it will be able to make recommendations the government consider in the interests of making our financial system the most competitive, transparent and accountable in the world,” Mr Turnbull said.

“This will not be an open-ended commission, it will not put capitalism on trial, as some people in the parliament prefer, and we’ll give it a reporting date of 12 months,” Mr Turnbull said. However, after back tracking from his original opposition to the inquiry in principle, the Prime Minister then retreated on the stated timeframe for the inquiry he’d annoucned. “It will be set up on the basis it reports within a year, but as you know, and again, being realistic about this, royal commissions take longer than originally planned,” he said.

The banks said the inquiry should be led by an eminent and respected ex judicial officer and its terms of reference should be “thoughtfully drafted and free of political influence”. The government’s terms of reference do not specify an investigation into the massive pay packets of top banking executives or protections for whistleblowers of financial misconduct, but appear broad enough to include them if its members wish.

Crossbench MP Bob Katter has already suggested social justice campaigner Tim Costello as a potential candidate to lead the royal commission.

Small Business Ombudsman Welcomes the inquiry

The Australian Small Business and Family Enterprise Ombudsman has welcomed the Prime Minister’s announcement and hopes the inquiry will examine past cases where small businesses had been unfairly treated.

Ms Carnell said her Small Business Loans inquiry earlier this year had identified numerous cases where small businesses had suffered from questionable conduct.

“The asymmetry in power between the banks and small businesses, together with the conduct of banks particularly since the global financial crisis in 2008, has left many small businesses in a devastating financial position,” she said. “Many have lost their businesses as well as their family homes, with no prospect until now of obtaining access to justice. I’ve been concerned that in some cases there may have been unconscionable behaviour by the banks and this should be examined in the Royal Commission.”

Ms Carnell said there had been significant progress in the past few years towards changing the behaviour of banks, including Unfair Contract Terms legislation and the establishment of the Australian Financial Complaints Authority. “What’s been missing is the capacity to review past disputes and award compensation,” she said.

“It’s not acceptable that banks called in loans where repayments were up to date. “Businesses were forced to close, people lost their jobs and entire communities suffered adverse impacts. The contract clauses were so one sided there was no constraint on the banks to stop them foreclosing on loans that didn’t fit their risk profile.”

Ms Carnell said the Small Business Loans Inquiry heard cases that clearly showed banks deliberately employed systematic poor and unreasonable behaviour to terminate business loans. The power imbalance meant small businesses had been denied access to justice.

“Many settlements occurred under duress because borrowers had little choice but to accept the bank’s offer,” she said. “They could not refinance because cash resources had been drained, they were facing penalty interest and had no negotiating power. I hope the Royal Commission probes these past cases and recommends compensation for those who were unfairly treated.”

SHARE WITH: