Given their role as the main targets, it seems strange that major banks now support the royal commission into financial service. The alternatives may be less appealing, especially if banks believe that all previous major misconduct and immoral conduct have been expose. The banks may lose their focus if the terms of reference are expand beyond banking.
Banks claim that uncertainty and speculation are creating unnecessary costs and distractions. This is most likely true. Even if major banks spent A$100million on royal commission, that amount is still less than 0.3% of annual profits for the majors. This has very little effect on shareholder returns.
With annual interest expenses of around A$65 billion, an estimate cost of A$100m or more could offset quickly by lower bank borrowing costs due to resolution of uncertainty. It is not clear if the government is justified in spending similar amounts of taxpayer money on a Royal Commission.
Too Broad A Definition Of Reference Financial
According to the draft terms of reference, the royal commission will focus on three issues that concern financial service entities. The first is the legal issue of identifying past misconduct cases in violation of regulations or laws.
The draft terms of reference seem to leave out credit. Lending has been an area that has caused major problems in the past. Although bank lending is cover by the draft terms of reference, it does not appear that financial service entities (such as mortgage brokers or lenders) are include in the definition. They only need an Australian Credit Licence and no Australian Financial Services Licence. Similarly, certain financial service entities are exempt from the AFSL requirement. This could prove problematic if draft terms of reference do not get amend.
Boards and top management of banks and other entities no doubt hope that there aren’t hidden skeletons in their closets. They also hope that they won’t be shock by revisiting past problems.
Although the term misbehaviour, which is not define in accordance with community standards and expectations, can be ambiguous, identifying past misconduct is an appropriate task for a royal commission. It shouldn’t be necessary. ASIC and other regulators have the necessary powers, if not sufficient resources, to detect and prosecute misconduct. The commission is also interest in the adequacy and use of these powers.
Misconduct And Misbehaviour
The royal commission’s second task is to determine if misconduct and misbehaviour could be attributed to poor governance and culture. This is especially problematic.
What evidence can be used to prove beyond reasonable doubt that there is a causal link between the non-quantifiable concepts of culture, governance, and specific instances of misconduct or general proclivity toward misconduct? They could also point to positive outcomes and behaviours within these institutions, which may suggest that the arrangements are not necessarily bad.
The third question that the commission must answer is: What changes can made to address these problems? This is where the danger lies. It’s a leap into the unknown, what are the likely outcomes of any propose changes?
The commission is face with many other challenges in its mission to make recommendations. A slew of regulatory changes are in the works following the 2014. Financial Services Inquiry as well as other government policy initiatives.
Relevant is also the financial technology revolution, or fintech. Which has created new business models, products, services and ways for customers to interact with financial service entities. They create the potential for misconduct and other bad behavior. It is not clear what lessons the royal commission will draw from history to help this new world.