Hayne commission must not try to remake banking

Australian Financial Review Mar 12 2018 11:45 PM

The AFR View

Australia has a well-managed, profitable, and well-supervised banking sector. In New York and London, casino banking was the source of contagion during the global financial crisis, while our conservative banks stood as a barrier against the spreading disaster. In Europe, weak and unprofitable banks have been a drag on the continent's recovery since the crisis. But not here. It is a record that should not be put at risk, even though opportunist politicians of all sides have threatened to do exactly that in recent years.

Our banks are not perfect, and neither are all of the people working for them. That is why a royal commission opens in earnest today, with strict terms of reference to look at complaints over the misconduct by banks and bankers towards their customers. The Hayne commission is not designed to be an inquiry into how our entire successful banking industry has been structured, and nor must it become one. It is already an accidental royal commission, which happened because the government found itself at a unique moment of vulnerability to its own grandstanding backbenchers who threatened to cross the floor when it was weakened and distracted in parliament by the citizenship crisis.

The government pre-empted this by calling its own royal commission and setting its own terms of reference. It also appointed Justice Kenneth Hayne as the commissioner. He is direct and rigorous, able to bring even difficult and emotional legal cases back to the point of law. Nor has he been afraid to go against the establishment. He will need that clinical objectivity because the commission will become a forum for many bitter individual complaints against banks, some of them legitimate, some of them simply cases in which bank customers' plans ended in disappointment or their own misjudgment. He has been specific that the commission is not going to re-litigate old cases.

The coming weeks will hear of claimed excesses in mortgage broking, credit card lending, car finance, rural finance, and not least, the governance of industry super funds. But a probe of this magnitude, simply by the fact of it happening, also sets up the expectation that some radical overhaul of the banking system should follow: a forced break-up of their activities, or perhaps an end of the so-called four pillars of four big retail banks enshrined as policy since 1990. It is hard to see how a royal commission with these terms of reference would cover the ground required to have a view of either. But a big visible result is how the politics of these things work – and a potential overreach that must be devoutly avoided. Ominously, the commission published an issues paper in February that focused on the relative profitability of the big four banks, and levels of competition, itself a highly contested point. It noted that we have more banks than ever, 28 of them, as credit unions have applied for banking licences.

The royal commission must also keep in mind that competitive and technological forces are reshaping Australia's banking and financial services sector. The vertical integration of banking, insurance and wealth management is being dismantled by the banks mostly out of business logic, not outside pressure. The four pillars policy ostensibly is designed to prevent a reduction in the number of rival big banks and so can be touted as pro-competition. Yet, as the Productivity Commission suggests, it also greatly dulls the takeover threat to incumbent boards and management and so can be argued to be anti-competitive.

The golden age of Australia's big banks is passing as they respond to demands for bigger capital buffers and ever more intrusive supervision – all happening well before the Hayne commission started sitting. The Australian Financial Review Business Summit heard just last week of the rising wave of digital disruption that is heading towards traditional intermediary businesses. For banking and other financial services, that will raise all sorts of security and customer protection issues that a royal commission down the track may be asked to deal with.