Not to put too fine a point on it, but the banking royal commission is delivering in spades.
If a single conclusion is to be reached at this early stage of the commission’s work, Australia’s biggest financial institutions are manifestly too big – too big for their boards, their chief executives and for easily bamboozled regulatory watchdogs.
As this writer observed almost a year ago in relation to Commonwealth Bank’s run of scandals: “[CBA] is, in short, dysfunctional. A leviathan bank too big to fail has proven too big to manage.”
This has clearly proven the case at financial services giant AMP. Damning testimony at the commission has made it abundantly plain that this “wealth manager” has been especially focused on managing its own wealth. It was revealed that AMP charged customers for financial advice that was never given and persistently lied about it to the Australian Securities and Investments Commission (ASIC).
AMP’s “devastated” CEO Craig Meller took responsibility for the egregious misconduct meticulously detailed by the commission and resigned with immediate effect.
“This is not the AMP I know,” a remorseful Mr Meller declared, which surely goes to the heart of why he needed to resign.
While the commission’s searing revelations have ensured no shortage of dramatic headlines, they only confirm what is already known, particularly in relation to the big four banks: they are a bloated, uncompetitive and untrustworthy government-sanctioned oligopoly.
In March, the Australian Competition and Consumer Commission (ACCC) issued an interim report for its Residential Mortgage Price Inquiry.
Its analysis of the big four banks (ANZ, Commonwealth Bank, National Australia Bank and Westpac) plus Macquarie Bank found “less-than-vigorous price competition”.
The ACCC argued that “opaque pricing of discounts” offered on residential mortgage rates makes it difficult for customers to make informed choices.
“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort,” ACCC Chairman Rod Sims said.
This matters because the ACCC found that the average interest rates paid for basic or “no frills” loans are often higher than for standard loans at the same bank and existing residential mortgage borrowers paid “significantly higher” interest rates than new borrowers at the same bank.
It doubly matters when considering that the big four banks account for 80 per cent of the owner-occupier home loan market and 85 per cent of all investor housing loans.
The big four banks promise fair competition but in fact offer faux competition.
A scathing draft report by the Productivity Commission released in February found that since the global financial crisis regulators have focused “almost exclusively” on prudential stability at the expense of competition.
While Australia has an “unquestionably strong financial system” consumers are not seeing the benefit of that in the form of competition.
“[M]uch of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products,” the report found.
This includes 4000 home loan products and 250 different credit cards on offer.
The Productivity Commission believes there is a role for a “competition champion”.
It notes that “institutional responsibility” for supporting competition in the financial system is “loosely” shared by the Australian Prudential Regulation Authority (APRA), the Reserve Bank, corporate regulator ASIC and consumer watchdog the ACCC.
“We need one of the regulators to be appointed by government as the competition champion, to take primary responsibility for putting the case for competition inside what are otherwise closed shop discussions,” Productivity Commission Chairman Peter Harris said.
Crucially, the report also raised the relevance of the so-called Four Pillars policy which ensures that whatever other consolidations occur in retail banking, the four major banks will remain separate.
The policy has had bipartisan support since the early 1990s, purportedly to ensure competition, but more likely because they consider change politically risky.
But why would there be objection to scrapping the policy? As the royal commission is making clear, if anything the policy is actively conspiring against fair competition.
The Productivity Commission considers the Four Pillars policy as “an ad hoc policy that, at best, is now redundant”.
The royal commission will almost certainly have to address the impact of the Four Pillars policy. Even if the commission stops short of recommending its abolition, it is hard to imagine it won’t at least recommend a review of the policy.
The Four Pillars policy is a protection racket. It enshrines one of the most powerful and profitable oligopolies in the world.
Each of the big four banks is a publicly listed company and it is obvious from the royal commission testimonies to date that these banks are placing the interests of shareholders ahead of customers. Even the most sanguine bank shareholders should be concerned by some of the ruthless behaviour that has occurred in their name.
Given the combination of protection by the Four Pillars policy and the clearly out of control cultures of the big four banks, culture will very likely loom large in the report of the royal commission.
“Culture” might seem a nebulous concept, but when banks are failing customers and the community to this extent there is something very wrong in the culture of these institutions.
Even the RBA, not one for getting caught up in management buzzwords, raised the issue of culture in April.
“The Australian financial system remains resilient and its ability to withstand adverse shocks continues to be strengthened,” the RBA said in its financial stability review.
“A central challenge facing banks is to address issues stemming from their culture.
“In Australia, there has been a significant number of examples of misconduct attributed to poor culture and some of the adverse implications of this are starting to materialise.”
The royal commission is systematically putting names – of shamed executives and burned customers – to the kind of behaviour that most Australians have come to expect of banks. This will prove more powerful than passing news headlines, toothless parliamentary committees and mostly ignored reports from regulators.
The now penitent Turnbull government, which was initially lukewarm, if not altogether graceless, in reluctantly calling the royal commission had better start considering how it will respond when the commission finally hands down its blueprint for reform.
It will almost certainly have to revisit the Four Pillars policy and it might also be faced with the question of how big is too big for an Australian bank in the 21st century.
The time for tinkering at the edges of Australia’s errant banking system may at long last be coming to a close.