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Ban ex-regulators from bank boards: Deutsche analyst
Australian Financial Review 10 Jan 2019 5:52 PM
Jonathan Shapiro
Former financial regulators should be banned from sitting on the boards of banks and other institutions following revelations of conflicts of interest at the Hayne royal commission, say Deutsche Bank's banking analysts.
The inquiry had exposed how the mortgage product had evolved from a means to afford a home to "a high-return financial-credit product which fabricated both a source and store of chimerical wealth", Matt Wilson and Anthony Hoo said in a note to clients published on Thursday.
The extent to which the family home had been 'financialised' made regulators vulnerable to capture given "the broader economic and political impacts of their actions", they said.
"Perhaps true courage and independence can only be obtained if financial regulators were essentially precluded from becoming directors of financial service enterprises."
The boards of financial institutions are littered with former heads of Treasury, the Reserve Bank of Australia and other government agencies.
Most notable is former RBA governor Glenn Stevens, who is a director of Macquarie Group. Two former heads of Treasury – Ken Henry and John Fraser – serve on the boards of National Australia Bank and AMP respectively.
Mr Wilson, previously head of research at JCP Investment Partners, joined Mr Hoo at Deutsche Bank late last year.
Regulatory capture
The two said examples of regulators stepping in early to "prevent or curtail excessive exuberance" were a "rare act" and that was partly a function of regulatory capture.
They expected the commission's final report, due on February 1, to propose an "independent conduct regulator" after the conflict between supervising the banks and promoting financial stability became apparent.
While there have been calls for the banks to lend more freely amid concerns of a Hayne-induced credit squeeze, the note said there would be a "sustained behaviour change at the major banks", which he said were "walking on eggshells".
A more diligent adherence to lending laws would move lending standards to "where they should have been".
"They went up because of aggressive credit; they will continue to fall due to the normalisation of underwriting standards," they said.
They said following the royal commission, mortgages would be smaller and take longer to process. That in turn would increase the amount of capital banks would need and might lead them to reduce their dividend payout ratios.
Shortage of advisers
The analysts said they expected the commission to follow Britain's lead and recommend mortgages be incorporated into the formal financial-advice regime, "given it generally is a household's largest financial transaction".
"We expect the consumer to bear some of the cost and for the revenue/advice model to be brought into line with the Future of Financial Advice regime," Mr Wilson said, also warning of a "serious shortage" of advisers.
The analysts said mortgage brokers were "here to stay" but revenue models would have to adapt to better reflect their role as fiduciaries that were valued for their independence.
They also predicted the Hayne royal commission would steer banks towards reinvesting in small-business lending skills, which he said had been pushed aside in an era when banks focused on lending at scale against the residential home.
They expected lower executive remuneration schemes skewed towards the long-term. "Changing the incentives and behaviour at the top of the organisation should permeate down through the ranks," they said.
