Rigging interest rates. Enabling money laundering. Giving misleading financial advice. These are just some of the things Australian banks have been accused of doing in recent years. Now, public outrage and a threatened rebellion by lawmakers has pushed Prime Minister Malcolm Turnbull to set up a public inquiry into the financial services industry. By one reckoning, it’s the 52nd investigation of Australian banks since the financial crisis.
1. What will the royal commission examine?
The inquiry will cover any misconduct by financial services companies or conduct that falls “below community standards and expectations,” and will also look into the adequacy of regulators’ powers. Pension funds will also be probed over how they use the public’s retirement savings. The draft terms of reference don’t envision looking into wider issues demanded by critics such as profitability or competition. The inquiry will need to submit an interim report in September and findings and recommendations within 12 months.
2. Are royal commissions common?
They are typically reserved for the most serious matters of public interest. Other royal commissions have looked into everything from U.K. nuclear tests in Australia in the 1950s to Aboriginal deaths in custody. One of the highest profile was a 1990s probe into police corruption in New South Wales, which resulted in seven officers receiving prison sentences, while hundreds were targeted for dismissal and internal investigation. The strict terms of reference and tight deadline of the banking royal commission may ensure it doesn’t veer off track. A 1980s inquiry investigating criminal activity by union members unearthed tax avoidance schemes that implicated many wealthy Australians. And a 2013 probe into child sexual abuse, particularly in churches and schools, has yet to submit its final report.
3. What have the banks done wrong?
Australia’s four biggest banks -- National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd., Westpac Banking Corp. and Commonwealth Bank of Australia -- have been plagued by scandals that have mounted since the global financial crisis erupted in 2008. Borrowers bemoaned that they failed to pass on interest-rate cuts while enjoying record profits. The securities regulator sued three lenders for attempting to manipulate the benchmark rate. Another is defending a suit by the financial crime agency that it repeatedly breached anti-money laundering laws. The banks have also been accused of giving poor financial advice, failing to honor insurance claims and mistreating small business owners.
4. Why now?
The government and banks have been resisting opposition calls for a public inquiry for months. Turnbull decided to move once the loss of his coalition’s majority amid a dual-nationality fiasco made some sort of probe inevitable. Banks made a similar calculation when they published a joint letter asking for a “properly constituted” inquiry to end uncertainty.
5. What has been done already?
Amid public pressure to tackle misconduct, the government this year hit lenders with an A$6.2 billion ($4.7 billion) levy, gave the regulator more control over executive conduct and required top bankers to defer bonuses. It also summoned the banks’ chief executives to give regular testimony to parliament. The Australian Bankers’ Association says the sector is already one of the most highly regulated in the world and since the financial crisis has co-operated with 51 separate reviews, investigations and inquiries -- a number of which are ongoing.
6. How will this intersect with these other inquiries?
That’s still a little unclear, considering the draft terms of reference say the royal commission isn’t required to look at matters that might “prejudice, compromise or duplicate” other inquiries or litigation. The Australian Securities and Investments Commission, which is investigating disclosure practices at Commonwealth Bank and looking at the industry’s mortgage underwriting standards, said it will press ahead with “business as usual.” The Australian Competition and Consumer Commission said its inquiry into mortgage pricing won’t be affected. Yet it’s hard to see how the royal commission could avoid touching on such topics entirely.
7. So what’s next for the banks?
Executives will be spending a lot of time with lawyers: UBS Group AG analysts estimate the inquiry will cost between A$50 million and A$100 million for each bank. It will also prove a distraction at a time of slowing revenue growth, heightened risks in the housing market and increasing competition from financial-technology firms. Still, there is a potential upside if a relatively quick royal commission gives the banks the chance to draw a line under all the grievances.
The Reference Shelf
- The royal commission’s draft terms of reference.
- QuickTake Q&As on the bank levy and the dual-citizenship fiasco.
- Australian banks go along with holding an inquiry.
- Bloomberg Gadfly’s David Fickling says there’s no need for an inquiry.