The Turnbull Government yesterday announced a Royal Commission is to be conducted into the banks. Ignoring for a moment the political angle and any commentary on this, the Royal Commission is a somewhat significant occurrence and it is probably worth understanding its terms of reference (as broad as they may be).
As noted by Adam Gartrell and Eryk Bagshaw in Fairfax Media, the royal commission will now examine all cases of "misconduct", including breaches of professional standards and not just "illegal and unethical" practices, across the insurance, banking and superannuation industries. It will focus on "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".
The government's terms of reference do not specify an investigation into the pay packets of banking executives or protections for whistle-blowers of financial misconduct, but they are sufficiently broad to include these if they wish. Union bosses could also be forced to take the stand, with industry super funds run by union executives under the spotlight over how they spend their members' superannuation funds. The commission does not have the power to provide victims of misconduct an avenue for compensation, putting at least a year-long delay on reparations for affected businesses or consumers.
The market didn’t react well, with bank shares hit by up to 2.5% in initial trade.
Some of the initial commentary is well worth a read. Tony Boyd in the AFR notes the royal commission is viewed by many as the triumph of politics over common sense. But it is structured in a way that could exacerbate the hatred of the financial services sector among a vocal minority. He, like other commentators, has noted the tight timeframe of just 14 months will likely constrain the ability of the commission to achieve too much. However, many commentators are already expecting that the deadline could well blow out as more political pressure is heaped on the government (or a potential new government during the term of the commission).
Phillip Baker, also in the AFR, has already suggested a key outcome could be increasing mortgage rates. He goes on to note that the commission process will also lead to an increase in regulatory costs for banks over the next 12 months. That not only puts further pressure on the profit outlook, it takes the focus of management away from dealing with the day to day running of the bank and the disruption that faces the sector right now. (That’s companies like Peer Estate.)
Back in April, Peter Van Onselen, in The Australian, argued the positive case for a Royal Commission which is worth a re-read. He argued Australia’s big four banks are the nation’s four largest companies, with a total market capitalisation of $450 billion. For context, the combined market capitalisation of every other company in the top 50 listed on the stock exchange is about $800bn, and that includes giants such as the big miners, Wesfarmers, Telstra and Woolworths. As such, maybe a little scrutiny, to ensure that are not abusing this market power, is a good thing? As he concluded, of course there are risks in holding a royal commission into the banks. But surely the greater risk is letting these huge businesses go unchecked.
What happens over the next 12 months (or more) is unknown. What we do know is that it will dominate the headlines for a long time and the initial market reactions from some of these headlines could be savage. Buckle in!
So what does it mean for us? Banks have dominated the lending landscape in Australia for generations. Non-bank lenders have a significantly smaller market share here than they do in the US or Europe. Whilst no one wishes any pain to the banks or their shareholders, this is yet another event that will continue to drive the market presence of non-bank lenders like Peer Estate. We pride ourselves on our transparency, whether that transparency is of information, price or terms. We will continue to grow our business, alongside that of our online brethren, and look forward to continuing to support you.