Third Report On Banks Recommends Focus on IO Loan Pricing

Last Thursday, the House of Representatives Standing Committee on Economics released their third report on their Review of the Four Major Banks.  They highlight issues relating to IO Mortgage Pricing, Tap and Go Debt Payments, Comprehensive Credit and AUSTRAC Thresholds.

Looking back at the issues The Committee raised since inception in 2016, they have had a significant impact on the banks and again shows how the landscape is changing, outside of a Banking Royal Commission.  It also suggests The Commission will not necessarily deflect scrutiny!

Here are the key points from their report:

Since the House of Representatives Standing Committee on Economics commenced its inquiry into Australia’s four major banks in October 2016, the Government has announced significant reforms to the banking and financial sector to implement the committee’s recommendations.

The Treasurer requested that the House of Representatives Standing Committee on Economics undertake – as a permanent part of the
committee’s business – an inquiry into:

  • the performance and strength of Australia’s banking and financial system;
  • how broader economic, financial, and regulatory developments are affecting that system; and
  • how the major banks balance the needs of borrowers, savers, shareholders, and the wider community.

In November 2016, the committee published its first report, which followed the first round of hearings a year ago in October 2016. The report contained 10 recommendations to reform the banking sector, including calling for new legislation and other regulatory changes to improve the operation of the banking sector for Australian consumers. In a second report in April 2017, following hearings in March, the committee reaffirmed the 10 recommendations of its first report and made an additional recommendation in relation to non-monetary default clauses.

In the 2017 Budget, the Treasurer announced the Government would be broadly adopting nine of the committee’s 10 recommendations for banking sector reform. These recommendations include putting in place a one-stop shop for consumer complaints, the Australian Financial Complaints Authority (AFCA); a regulated Banking Executive Accountability Regime (BEAR); and, new powers and resources for the Australian Competition and Consumer Commission (ACCC) to investigate competition issues in the setting of interest rates. The government also adopted the committee’s recommendations in relation to establishing an open data regime and changing the regulatory requirement for bank start-ups in order to
encourage more competition in the sector.

The Committee’s Third Report makes the following recommendations to Government:

  • The committee is concerned by the increase in transaction costs merchants
    now face as a result of the shift to tap-and-go payments. These costs are
    ultimately borne by customers. If the banks do not act by 1 April 2018, regulatory action should be taken to ensure that merchants have the choice of how to process “tap and go” payments on dual network cards. At present merchants are forced to process these transactions through schemes such as Visa and MasterCard rather than eftpos. It is estimated that this forced processing costs merchants hundreds of millions of dollars in additional annual fees at present;
  • The Australian Competition and Consumer Commission, as a part of its inquiry into residential mortgage products, should assess the repricing of interest‐only mortgages that occurred in June 2017;
  • Despite many commitments by banks in the past to implement CCR, little
    progress has been made. The Government should introduce legislation to mandate the banks’ participation in Comprehensive Credit Reporting as soon as possible; and
  • The Attorney‐General should review the major banks’ threshold transaction reporting obligations in light of the issues identified in the Australian Transaction Reports and Analysis Centre’s (AUSTRAC) case against the Commonwealth Bank of Australia.

Interest Only Mortgage Loans

Specifically on the IO loan situation, while the banks’ media releases at the time indicated that the rate increases were primarily, or exclusively, due to APRA’s regulatory requirements, the banks stated under scrutiny that other factors contributed to the decision. In particular,banks acknowledged that the increased interest rates would improve their profitability. A key reason for such an improvement is that the major banks increased rates on both new and existing interest-only loans in June 2017. This is despite APRA’s interest-only measure only targeting new lending. As of 6 October 2017, analysts at CLSA estimated that the banks’ net interest margins increased by up to 12 bps following the rate increases announced in June and March.

The improvement in net interest margins is forecast to be so beneficial for Westpac that several analysts upgraded their outlook following the price announcements in June 2017.

The ACCC is currently conducting an inquiry into residential mortgage products. This inquiry was established to monitor price decisions following the introduction of the Major Bank Levy. As a part of this inquiry, the ACCC can compel the banks affected by the Major Bank Levy to explain any changes to interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018.

The committee recommends that the ACCC analyse the banks’ internal documents to assess whether or not they are consistent with their statements in their June 2017 media releases and subsequent public commentary. In particular, the ACCC should analyse the banks’ decisions to increase interest rates on existing borrowers despite APRA’s measure only targeting new borrowers. Further, the ACCC should consider whether the banks’ public statements adequately distinguish between new and existing borrowers. The ACCC should consider whether the media statements suggest rates on existing interest-only mortgages rose as a direct consequence of APRA’s regulatory requirement. It will be important that the ACCC conducts granular analysis of the financial modelling of the banks. The ACCC will need to understand the true financial impact on the banks of APRA’s regulatory changes, and assess that impact against the public statements of the banks.

Will The Royal Commission Restore Trust, Certainty and Confidence in our Banking System?

That was the hope expressed during Westpac’s AGM held last Friday. It was interesting to hear from both Chairman and CEO on the upcoming Royal Commission.

Westpac chairman Lindsay Maxsted said

it is our hope that, ultimately, the newly announced royal commission will play a role in restoring trust, respect and confidence in Australia’s already strong financial system.

But, given the multiple inquiries which have run over recent months,  Westpac consistently argued that further inquiries into the sector, including a royal commission, were unwarranted.

He did concede that there had been some instances where the banking sector had failed to meet customer expectations and banks had underestimated the subsequent backlash from customers, regulators and the government.

CEO Brian Hartzer said

We are embracing the royal commission as a way to finally draw a line in the sand on calls for inquiries.

and asserted that the banks have “been a political football for too long”.

That’s why we have now accepted the need for a royal commission to create certainty and confidence in our banking system.

So, it is worth noting that the scope is still being wrangled, and the process will take at least a year. It is also has a broad set of terms, spanning not just the banks. Yes, the  announcement may ease the political debate, but that is not the end of the matter.

If past inquiries are any measure, there will be steady coverage as it progresses, and depending on the findings, it may, or may not rebuild confidence.

It seems to me that there can be no guarantees – and we still await the outcomes of the Productivity Commission on vertical integration, and ACCC on mortgage pricing.

So we think the outlook for the banks remains, at least, cloudy!



Banking royal commission: The questions commissioner Kenneth Hayne needs to ask and the banks must answer

From ABC News.

The Government and major banks were staunchly against a royal commission until it became all but inevitable that an inquiry would happen with or without their imprimatur.
That has led many to question whether the terms of reference have been designed to reduce the scope of the commission in a way that limits the amount of wrongdoing that might be uncovered.

“It is carefully crafted to avoid a lot of the potential bear traps,” said banking analyst Martin North from Digital Finance Analytics.

“It’s probably the one you have to have, I’m not sure it’s really going to add much to the real debate and I’m not sure the outcomes will be really significant.”

CLSA banking analyst Brian Johnson concurs the terms of reference are weaker than what Labor, the Greens and some dissident Nationals had in mind.

But he also noted the extensive and compulsive investigative powers of royal commissions tend to mean they turn up surprising findings — the “unknown unknowns” as former US defence secretary Donald Rumsfeld famously put it.

“If it doesn’t actually turn up anything that we don’t know already then it is really a waste of time,” Mr Johnson said.

“This does provide a mechanism for aggrieved parties to basically purge themselves, so that’s where the risk basically lies [for the banks].”

What skeletons remain in the cupboard?

The Government’s main argument against a royal commission is that it has already held a range of inquiries and undertaken a number of reforms to improve financial sector regulation and accountability.

Martin North agrees a lot of progress has been made.

“Over the last 18 months or so, there have been a whole series of improvements in the regulatory framework in and around banks,” he said.

“A lot of the things that should have been done have been done already.”

Mr North cited the Productivity Commission review of so-called vertical integration (where banks cross-sell a wide range of products and services to their customers), the ACCC’s investigation into bank price setting and the Banking Executive Accountability Regime as examples.

However, Mr North said the biggest elephant in the room remains largely ignored.

“The critical question for me is about lending, and about lending standards,” he said.

“I have a view that we are at a very early stage of understanding just how far from where we should have been have the lending standards been … that is the real black hole at the moment.”

Mr North said there may be a ticking time bomb of bad loans that could turn into rising defaults over the next three to five years.

“If you look at the lending standards today and you compare them to two or three years ago, there are many people holding mortgages today who would not now have got those mortgages,” he said.

“But I also believe that even today, the lending standards are still too loose and there are households today who are able to get mortgages and committing to mortgages that they shouldn’t be getting.”

Mr North said there was also a lot more to be discovered in the areas of financial planning and mortgage broking.

“I also think that we’ve still got some questions around the conflicts of interest, for example, from mortgage brokers and financial advisers and how they back-end into the overall financial services sector,” he said.

“Those are the two things that I think are the critical issues but I don’t think either of them will get touched very hard in this review.”

Mr Johnson said another key issue that may not be examined in the royal commission is the economic fallout of having such large, super-profitable major banks.

“The 10-year bond rate is something like 2.6 per cent and we’ve got banks doing an ROE [return on equity] of about 15 per cent, which is amongst the highest in the world,” he said.

“That high level of profitability, perhaps that is a tax on the rest of the economy.”

Time more limited than terms of reference

While the terms of reference give relatively broad scope for Kenneth Hayne to take a wide looks across the financial sector, he has only been given a year to do so.

This is slightly less than the Northern Territory royal commission investigating youth detention.

It is almost a full year less than the Trade Union Royal Commission, which was extended from nine months to nearly two years at the request of commissioner Dyson Heydon who found there was insufficient time to complete his inquiry into half a dozen trade unions.

This inquiry is intended to look at hundreds of financial companies, many of which are worth well over $1 billion and each sell hundreds of individual products.

Given the number of victims of the financial scandals the public have been made aware of, the royal commission looking at institutional responses to child sexual abuse may provide a better guide of how much time is needed for a genuinely thorough inquiry.

It was originally intended to take two years, however it was extended to four years due to the sheer volume of victims’ stories that needed to be told.

Will the royal commission raise mortgage rates?

As for bank claims the bad publicity and possibility of new scandals arising from the royal commission would push up overseas funding costs and therefore mortgage interest rates, Mr Johnson is sceptical.

“The cost of three-year and five-year money is back down at the low points of the cycle,” he said.

“It certainly would be more driven by what we see happening in credit markets generally than this idea that suddenly investors would desert the Australian banks.

“I just think that’s over-hyping it and it’s a somewhat convenient argument.”

Mr Johnson said where Australians choose to park their savings is a much more important factor for lending interest rates than whether international investors are investing.

“The funding costs for the Australian banks are far more sensitive to deposit pricing than they actually are to wholesale funding,” he added.

Ironic in light of the latest scandal, exposed by Ben Butler in The Australian, where the major banks rolled term-deposit customers over into much lower interest rate products after their initial deposit matured without adequate warning that this would happen.

Misconduct Inquiry Adds to Challenges at Australian Banks

From Fitch Ratings.

The Royal Commission into alleged misconduct in Australia’s financial sector announced on 30 November 2017 adds to the challenges for the system, says Fitch Ratings. It could potentially weaken the reputation of the system or individual entities, and exert further pressure on profitability, even if it does not identify broad or significant failings.

We continue to believe the system is well regulated and that the major banks are among the strongest that we rate globally. However, momentum for an inquiry has increased following a number of conduct issues across wealth management, life insurance and banking that have been identified in recent years. These incidents appear to be isolated, and we have not changed our view that the risk-management frameworks and policies of Australian banks are fundamentally sound. Any commission findings to the contrary are likely to result in Fitch reviewing ratings of affected banks.

Public perception of Australian banking has been weakened by the debate leading up to this inquiry, and may be further undermined by the Royal Commission, regardless of whether it exposes significant shortcomings. The reputation of the system is particularly important as the Australian banking sector is heavily reliant on foreign investors for funding. Any loss of trust may lead to higher wholesale funding costs, which in turn could intensify competition for deposits and push up funding costs for the entire system.

Profitability would be pressured by a rise in funding costs, while interest rates and fees on banks’ products would also be most likely to come under additional scrutiny. We already expect profitability to be squeezed in 2018, with margins likely to narrow as a result of low local interest rates, competition for assets and deposits, and upward pressure on funding costs from rising global interest rates. Slower asset growth and a rise in loan-impairment charges could also drag on profits.

Banks may seek to offset any sustained impact on profit by taking on additional risk, although we would expect the regulator to ensure this is adequately managed, meaning any increase in risk appetite should be limited.

The major banks have a strong competitive advantage in the Australian market, and there is a danger that the commission ultimately leads to some erosion of this position at smaller Australian banks and other competitors, such that the banks’ ability to set prices is weakened. The commission may also move the focus of bank management away from the day-to-day running of the bank, which could give an advantage to competitors.

The inquiry is to submit its final report within 12 months of its establishment, with an interim report to be provided by September 2018.

What will the banking Royal Commission mean for real estate?

The Royal Commission into the banking sector is likely to further tighten mortgage liquidity.

From The Real Estate Conversation.

The Royal Commission into the banking sector is likely to further tighten mortgage liquidity, said Malcolm Gunning, president of the REIA, to SCHWARTZWILLIAMS.​

“The banks have been tightening their lending in anticipation of the enquiry [with APRA’s regulations]. In Sydney and Melbourne, property is coming off the boil,” he said.

The Royal Commission is likely to cause the banks to take an even more “cautious” approach, said Gunning.

Yesterday, after months of speculation, the federal government announced it will establish a Royal Commission into the “alleged misconduct” of the Australian banking and financial services sectors.

“The enquiry is important; we need a robust banking system to underpin Australia’s growth. But it shouldn’t be a witch hunt,” said Gunning.

Gunning is keen to see the enquiry address perceived conflicts of interest within the financial services industry, particularly in the superannuation sector, and applauded the government’s move to impose broader-than-expected terms of reference, covering conduct in the insurance, financial services, and banking sectors.

“I think the banks have a lot of policy where they’re providing advice on the one hand and lending on the others, and there is a blurring of lines between the businesses,” he said.

“What we should see is a clear delineation in conflicting areas of the bank, particularly for superannuation,” said Gunning.

Gunning said the Australian mortgage lending market is already facing tighter regulation and red tape.

“We’ve had about seven real estate regulations bought in over the last year, with stamp duty, first-home buyer incentives and so on, and next year there could be new money laundering regulations. Now the banking enquiry,” he said.

“That will mean our open lending market will start to tighten,” said Gunning.

Gunning said banks could get around this with greater emphases on “back door” lending.

“I think we’ll see very strong growth in the second-tier lenders,” he said.

The Commission is scheduled to run for 12 months, with its finding due to be released in February 2019. It is expected to cost $75 million.

Bank shares were weaker yesterday, but at the time of writing were staging a modest recovery.

Broad mandate for financial services royal commission takes the heat off banks

From The Conversation.

It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.

The banks argue that ongoing speculation and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns.

And with annual interest expenses in the order of A$65 billion, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.

Terms of reference too broad

The draft terms of reference of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities).

One apparent omission in the draft terms of reference relates to credit – and lending has been a major problem area in the past. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.

The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.

Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.

The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.

What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad.

So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes.

In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of regulatory changes in progress following on from the 2014 Financial Services Inquiry and other government policy initiatives.

Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.

The banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the reference to superannuation fund trustees and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.

Author: Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

Why the big four asked for a parliamentary inquiry into banking

From The Conversation.

The major Australian banks are following familiar public relations tactics in requesting a parliamentary commission of inquiry into banking and financial services.

When the public mood is against an industry, it will try to win the public over, while getting the politicians to ignore the public mood. If that fails, the industry gradually concedes ground until attention goes elsewhere.

For this reason, the banks went from being steadfastly against a commission, to offering the option of self-regulation, to proposing a new “banking tribunal”, to eventually conceding, after the battle had already been lost, to a parliamentary inquiry.

The big problem for the banks, and a big part of the reason that their previous lobbying failed, is that their popularity with the Australian public is very low. This allowed, or pressured, politicians to call for the commission, and presents significant problems for the banks going forward, especially if they wish to avoid tougher regulation.

The banks capitulated only once it became “all but inevitable” that an inquiry of some sort would be held.

Due to the recent citizenship saga, it was looking likely that a coalition of crossbench, Labor, Greens and some Nationals MPs would pass a bill for a commission of inquiry into the banks and other financial institutions.

Labor had already promised to set up a royal commission into the banking and financial services industry if it won the next election.

Concede ground only when it’s already lost

A royal commission will almost certainly bring many months of bad press for the banks.

As the industry has repeatedly made clear, it never wanted a royal commission. The banks claimed they had corrected the mistakes of the past and that a commission was “unwarranted”.

So the banking industry’s public and private lobbying efforts were geared towards convincing politicians to resist calls for the commission, while trying to boost public opinion by highlighting their corporate social responsibility.

This involved sacking executives over this scandal or that, removing certain ATM fees, and cutting bonuses and director pay.

The banks have also launched advertising campaigns, such as one highlighting that many Australians own bank shares through their superannuation.

Concurrently, the banks hoped that threatening to launch a “mining tax”-style ad campaign might scare politicians away from calling for a commission.

These campaigns have become a common threat since the success of the 2010 mining tax campaign opened corporate Australia’s eyes to the potential effectiveness of advocacy ads.

Tactics similar to those the banks are employing now have been used to varying degrees of success in the United States by the tobacco industry and the gun, finance and healthcare lobbies.

In 1998 the American tobacco industry agreed to make payments of over US$200 billion to dozens of states. But this happened only after decades of public education and campaigning against smoking.

Similarly, the American healthcare lobby successfully fought off several attempts to reform healthcare. Obamacare managed to pass in 2010 only after the industry got to substantively write it.

The public relations game

Appearing to co-operate and atone is the best way to try to influence the terms of an inquiry. It also helps to mitigate the worst of any bad press to come. This reflects a wider, pragmatic strategy of lobbying and public relations employed by the banks and other industries.

The focus for the banks will now shift towards damage control, along with heavy promotion of the banks “doing the right thing” by Australia.

To that end, expect to see even more banners proclaiming a bank’s sponsorship of the local footy team, and ads promoting the good work done in your local community.

These, along with an insistence that the commission is a witch hunt, that its findings are “old news”, that the banks have already taken steps to deal with the issue, will underpin the industry’s public relations battle while the royal commission takes place.

Author: George Rennie, Lecturer in American Politics and Lobbying Strategies, University of Melbourne

Royal Commission, Draft Terms Of Reference

The draft terms of reference are out for the Royal Commission into the Banking, Superannuation and Financial Services Industry.

The scope has been carved out to avoid issues already being looked at elsewhere, such as the Productivity Commission looking at vertical integration, or ACCC on product pricing, and so is focussed on alleged misconduct.  The BEAR regime is also separately designed to deal with executive behaviour.  The bad behaviour is broadly defined across financial services (so we assume mortgage brokers, and financial advisors would be in scope).  And it is relative to community standards, so plenty of wriggle room there. Also, the scope is much narrow than that being hawked about on the back benches, one reason why both the Bank Leaders and Polys both fell in behind the current narrower scope.

The scope does not touch in broader policy or regulatory issues (such as macroprudential) but could conceivably cover lending standards and “liar loans”. One potential outcome could be to lift the lid on “not unsuitable” lending.  It does not consider the disruptive intrusion from digital or Fintech.

So we suspect the focus will be more on poor disclosure, bad contracts, and areas where the community has been most vocal – for example, poor financial advice, disputed insurance claims, and SME lending and foreclosure.

We will be interested to see the extent to which the mortgage industry is impacted.

From an industry perspective, it introduces a whole new set of risks for potential investors to consider, and so while the political uncertainty has been defused, the ongoing industry uncertainly may lead to a risk premium being required to placate investors, so leading to some upward pressure on product pricing.  But it is unlikely to lead to any fundamental structural reform.


Australia has one of the strongest and most stable banking, superannuation and financial services industries in the world, performing a critical role in underpinning the Australian economy. Our banking system is systemically strong with internationally recognised, world’s best prudential regulation and oversight.

Most Australians are consumer sof banking, superannuation and other financial services. The superannuation system alone in Australia has created more than a $2 trillion retirement savings pool, which continues to grow rapidly, and which compels all working Australians to defer income today for their retirement.

All Australians have the right to be treated honestly and fairly in their dealings with banking, superannuation and financial services providers. The highest standards of conduct are critical to the good governance and corporate culture of those providers.

These standards should continue to be complemented by strong regulatory and supervisory frameworks that ensure that all Australian consumers and businesses have confidence and trust in the financial system.

The Government will appoint a distinguished serving or former judicial officer to lead a Royal Commission into the banking, superannuation and financial services industries.

The Commission’s inquiry will not defer, delay or limit, in any way, any proposed and announced policy, legislation or regulation of the Government.

Terms of Reference

1. The Commission must inquire into the following matters;
a) the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf);
b) any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations;
c) the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members;
d) whether any findings in respect of paragraphs 1(a), (b) and (c):
i. are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the industry or relevant subsector; and
ii. result from other practices, including risk management, recruitment and remuneration practices;
e) the effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by a financial service entity;
f) the adequacy of:
i. existing laws and policies of the Commonwealth (taking into account law reforms announced by the Government) relating to the provision of financial services;

ii. the internal systems of financial services entities; and

iii. forms of industry self-regulation, including industry codes of conduct;
to identify, regulate and address misconduct in the industry, to meet community standards and expectations and to provide appropriate redress to consumers and businesses;
g) the effectiveness and ability of regulators of a financial services entity to identify and address misconduct by those entities;
h) whether any further changes to:
i. the legal framework;
ii. practices within financial services entities; and
ii. the financial regulators,
are necessary to minimise the likelihood of misconduct by financial services entities in future (taking into account any law reforms announced by the Government); and
i. any matter reasonably incidental to a matter mentioned in the above paragraphs, 1(a) – 1(h).

2. In conducting its inquiry the Commission should give priority to matters which in its opinion, have greater potential for harm if not addressed expeditiously.

3. Inquiring into the matters set out in paragraph (1)(f), the Commission:
a) must have regard to the implications of any changes to laws, that the Commission proposes to recommend, for the economy generally, for access to and the cost of financial services for consumers, for competition in the financial sector, and for financial system stability; and
b) may have regard to comparable international experience, practices and reforms.

4. However, the Commission is not required to inquire, or to continue to inquire, into a particular matter to the extent that to do so might prejudice, compromise or duplicate:
a) another inquiry or investigation; or
b) a criminal or civil proceeding.
And, the Commission may choose not to inquire into certain matters otherwise within the scope of this Inquiry, but any such decision will be the Commission’s, alone.

5. The Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight.

6. The Commission may submit to the Government an interim report no later than September 2018 and must submit a final report within 12 months.

The final report is to contain:
a) its findings; and
b) any recommendations relevant to the inquiry that the Commission thinks fit.


financial service entity means an entity (other than a Commonwealth entity or company) that is:
a) an ADI (authorised deposit-taking institution) within the meaning of the Banking Act 1959;
b) an entity that carries on the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, including:
i. a general insurer within the meaning of the Insurance Act 1973; and
ii. an entity undertaking life insurance business within the meaning of the Life Insurance Act 1995.
c) a person or entity required by section 911A of the Corporations Act 2001 to hold an Australian financial services licence or who is exempt from the requirement to hold a licence by virtue of being an authorised representative; or
d) an RSE licensee of a registrable superannuation entity (as that term is defined in the Superannuation Industry (Supervision) Act 1993) and any entity that has any connection (other than an incidental connection) to the RSE licensee of a registrable superannuation entity.
Macro-prudential policy and regulation means policy and regulation, including as to the structure, role and purpose of financial regulators, that is concerned with containing systemic risk, which can have widespread implications for the financial system as a whole, beyond simply the banking system.
misconduct includes conduct that:
a) constitutes an offence against a Commonwealth, State or Territory law in relation to the provision of a financial service, as existed at the time of the alleged misconduct; or
b) is misleading and/or deceptive; or
c) indicates a breach of trust or duty or unconscionable conduct; or
d) breaches a professional standard or a recognised and widely adopted (conduct) benchmark.

Turnbull government announces banking royal commission in major backflip

From The New Daily.

The Turnbull government has announced it will hold a royal commission into the banking sector, in a major policy backflip.

The decision came after the big banks wrote to the government saying an inquiry was necessary to end business and economic uncertainty.

Prime Minister Malcolm Turnbull announced the royal commission in a press conference in Canberra on Thursday morning.

“The chief executives and chairman of the big four banks have written to us, asking the government to step in, end the uncertainty and ensure an orderly process that addresses the concerns,” the PM said.

“Cabinet has met this morning and has determined that the only way we can give all Australians a greater degree of assurance about the financial system is through a royal commission into misconduct in the financial services industry.”

He said the royal commission would last for 12 months, and would report to government in February 2019. It would cover not just the banks, but also fund managers, superannuation funds and insurance companies.

The decision to hold a royal commission came within hours of a letter from the big banks addressed to Treasurer Scott Morrison, in which they called for the government to launch an inquiry.

“We are writing to you as the leader’s of Australia’s major banks,” the letter read.

“In light of the latest wave of speculation about a parliamentary commission of inquiry into the banking and finance sector, we believe it is now imperative for the Australian Government to act decisively to deliver certainty to Australia’s financial services sector, our customers and the community.”

It went on: “We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence.

The government’s bombshell announcement followed a major threat from Nationals MPs to cross the floor and back a bill that would have established a banking ‘commission of inquiry’ behind the government’s back – a move that would have significantly undermined the PM’s authority.

In his speech, Mr Turnbull said the decision to call a royal commission was based on a desire to put an end to uncertainty that was coming from this threat.

“The banks … do not believe an inquiry is necessary, but they have raised – and you may have seen their letter to us – serious concerns that the ongoing uncertainty is undermining the financial system,” he said.

“Now the speculation about an inquiry cannot go on. It’s moving into dangerous territory, with some of the proposals being put put forward have the potential seriously to damage some of our most important institutions. We have got to stop the banks and our financial services sector being used as a political football.

“It may be politically advantageous to some people to do so, but it runs the risk of putting vital economic interests at stake, and runs the risk of putting them under threat.”

He said the decision was “a regrettable but necessary action”.

A Banking Royal Commission is ON!

A Banking Royal Commission has been announced.

This from the ABC:

Malcolm Turnbull has announced a royal commission into the banking sector, after Australia’s big four banks wrote to the Treasurer asking for an inquiry to restore public faith in the financial system.

A letter signed by the chairpersons and chief executives of ANZ, Commonwealth, NAB and Westpac argued that even though the sector had long campaigned against it, such a measure was now in the national interest.

“Our banks have consistently argued the view that further inquiries into the sector, including a royal commission, are unwarranted,” the letter said.

“However, it is now in the national interest for the political uncertainty to end.”