Banking Royal Commission missing the point

This week the Government announced the draft terms of reference for a “Royal Commission into misconduct in the banking, superannuation and financial services industry”.

Previously we’ve expressed our view as to why a banking commission would be a royal waste of time. Whilst there was always a possibility that some positive outcomes could be derived from such an inquiry, after reading the terms of reference, we’re now even more convinced this banking inquiry will be futile.

Opportunity lost

A banking royal commission provides an opportunity for a thorough examination of issues in the banking system, and importantly, to set out actions to resolve the issues raised.

Unfortunately, the terms of reference just announced are so narrow that they are highly unlikely to uncover the real issues in our financial system. The focus of the royal commission is on misconduct. Whilst addressing misconduct is important, in reality, there are more meaningful features of the Australian banking industry that are leaving consumers with worse outcomes than should be expected of what is regarded as one of the leading financial sectors in the world.

The terms of reference also limit the scope for actions that might be taken to properly address these issues in the near-term and foster a platform for the Australian banking sector to thrive.

Lack of competition

Our view is that the most important matter the royal commission should review and address if motivations really were to improve consumer outcomes, is the lack of competition in our financial system. Unfortunately, the terms of reference are silent on matters relating to competition and don’t mention issues related to the market dominance of our four major banks.

If we let a small number of banks retain a stranglehold on our lending markets, can we ever be relieved of misconduct? Shouldn’t, therefore, the promotion of competition and a levelling of the playing field be front and centre in the terms of reference, even if misconduct is at the core of what the Government wishes to address?

Shift to free-market finance

We also believe that the royal commission should be looking closely at the deposit guarantee scheme that exists in Australia – such schemes are an anti-competitive, costly anachronism, that has no place in a modern financial system, as was recently explained in the Financial Times.

The terms of reference carve our macro-prudential policy, so the most important structural questions that need to be asked in relation to our banking system are likely to be ignored at the expense of attention-grabbing headlines in relation to senior executive pay and poor corporate cultures.

No recognition of prior work

There’s also no specific requirement to look into the progress of recommendations made under previous enquiries, including the 42 recommendations made in 2014 Financial System Inquiry, or recent conclusions made by the ACCC in relation to our banking system.

There has been a vast amount of time and energy devoted to reviewing our financial system over recent years, and for this knowledge and understanding to be ignored implies the royal commission is really out to serve vested interests, not the Australian consumer.

This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.

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