Category: Banking Culture

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.

Context

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.

Definitions

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.”

 

 

 

 

Major Banks Call For “Proper” Banking Inquiry

The four banks have now sent a letter to the Treasurer asking for a properly constituted inquiry into the financial services sector to be established.

The letter is signed by the current CEO’s and Chairs: ANZ chairman David Gonski, ANZ CEO Shayne Elliot, CBA chairman Catherine Livingstone, CBA CEO Ian Narev, Andrew Thorburn, Westpac chairmen Lindsay Maxsted, and Westpac CEO Brian Hartzer.

We are writing to you as the leaders of Australia’s major banks. 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.

Our banks have consistently argued the view that further inquiries into the sector, including a Royal Commission, are unwarranted. They are costly and unnecessary distractions at a time when the finance sector faces significant challenges and disruption from technology and growing global macroeconomic uncertainty.

However, it is now in the national interest for the political uncertainty to end. It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong.

As you know our banks have acknowledged that we have not always got it right, and have made mistakes. Together with the Government and regulators, since 2014 we have been taking action to fix issues, and improve what we do and how we do it. We have collectively appeared before, or taken part in 51 substantial reviews, investigations and inquiries since the global financial crisis, 12 of which are ongoing. We continue to demonstrate our commitment to doing the right thing by our customers and seeking to ensure those genuinely affected by these mistakes are appropriately compensated.

A strong, well-regulated and well-governed banking system is in the interests of all Australians and is critical to job creation and fairness. The strong credentials of the banking system ensured Australians were spared the worst of the Global Financial Crisis, and have been fundamental to the ongoing performance of our economy despite global and domestic political turmoil.

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.

In our view, a properly constituted inquiry must have several significant characteristics. It should be led by an eminent and respected ex judicial officer. Its terms of reference should be thoughtfully drafted and free of political influence. Its scope should be sufficient to cover the community’s core concerns which include banking, insurance, superannuation and non-ADI finance providers. Further to avoid confusion and inconsistency, the inquiry must to the most practical extent replace other ongoing inquiries.

It is vital that the terms of any inquiry consider the many reviews and inquiries that have been conducted into the banking sector in recent years; the significant government and industry-led reforms that have been and will shortly be implemented; the 44 recommendations made in the Financial System Inquiry in 2014; and the broad and positive contribution that banks make to the Australian economy and to millions of customers and shareholders.

It is also important that any inquiry reports back in a timely manner so that we can have certainty about the findings and move forward to implement any recommendations.
We will work hard to ensure our contribution to any process helps to further strengthen Australia’s financial services system.
Throughout this, our focus will remain on our customers. We are proud of the work our people do every day to support them. That work continues.

Youi pays $164,000 for poor insurance sales practices

ASIC says Youi has refunded 102 consumers approximately $14,000 in total, and will pay $150,000 as a community benefit payment to the Financial Rights Legal Centre’s Insurance Law Service, after ASIC raised concerns about its home and car insurance sales practices.

Youi has also engaged an independent firm (EY) to conduct a review of sales practices in response to concerns that some sales staff were charging consumers for insurance policies without their consent to purchase. This included where consumers only made an inquiry to get an insurance quote.

ASIC was concerned that Youi’s remuneration and bonus structures incentivised sales staff to prioritise sales ahead of consumers’ interests.

Since the review, Youi has:

  • Changed its remuneration structure and reduced the incentives provided to sales staff based on sales volumes
  • Reviewed sales scripts and staff training
  • Introduced new controls and monitoring of sales staff
  • Made significant changes to its legal, risk and compliance capability.

EY will conduct a follow-up review to assess the implementation and test the effectiveness of the recommendations made in their initial assessment of Youi’s risk culture and review of sales practices. A final report will be provided to ASIC by 30 June 2018.

Acting ASIC Chair Peter Kell said positive consumer outcomes should be at the heart of sales structures: ‘It is completely unacceptable that customers were signed up for Youi insurance policies without their knowledge or permission.’

Consumers who believe they have a dispute with Youi should contact Youi directly on 07 3852 7895. The Financial Ombudsman Service can provide further assistance on 1800 367 287.

Background

The Financial Rights Legal Centre’s Insurance Law Service is a national service providing consumers free advice about insurance problems.

ASIC’s MoneySmart website has information for consumers about getting the best deal on insurance, including what to look for in insurance products so they can find the right policy for their needs.

CBA announces major lending changes

From The Adviser.

CBA has today revealed a raft of changes including LVR caps and restrictions to rental income for serviceability that will impact mortgage brokers and their clients from next week.

On Saturday (2 December) CBA will introducing a new Home Loan Written Assessment document called the Credit Assessment Summary (CAS) for all owner occupied and investment home loan and line of credit applications solely involving personal borrowers.

“These changes further strengthen our responsible lending commitments related to the capture and documentation of customer information,” the bank said.

“The CAS will present a summary of the information you provided on behalf of your borrower(s) and / or that the Bank has verified (where relevant) and used to complete its credit assessment.”

It will include a summary of loan requirements and objectives, personal details and financial information, total monthly living expenses at a household level and information about the credit applied for.

CBA said the CAS will form part of the loan offer document packs for all owner occupied and investment home loan and line of credit applications.

“The CAS will not be issued for Short Form Top Up applications or applications involving non-person applicants (i.e. Trust or Company). The Document Checklist, which is on the last page of the Covering Letter to Borrower (Full Pack), will indicate when a CAS has been issued,” the group said.

“An application exception will be raised if the CAS is not returned or not signed by all personal borrowers. The application will not progress to funding until the exception is resolved.”

LVR and postcode restrictions

Meanwhile, CBA confirmed that it will introduce credit policy changes for certain property types in selected postcodes from Monday 4 December.

The changes include reducing the maximum LVR without LMI from 80 per cent to 70 per cent, reducing the amount of rental income and negative gearing eligible for servicing and changing eligibility for LMI waivers including all Professional Packages and LMI offers for customers financing security types in some postcodes.

“We continue to lend in all postcodes across Australia,” CBA said.

However, on Monday the bank will also introduce what it has called the Postcode Lookup Tool, which will be available under the Tools and Calculators section on CommBroker.

“This tool will provide you with detail on policies that may apply in certain areas. You should use this tool during your customer discussions to understand policies that may apply to postcodes in which they have expressed a home lending need. If policies apply, you should discuss these with your customers,” the bank said.

What Our Bank Leaders Can Learn From Amazon’s Jeff Bezos

From theBankDoctor.

Amazon is well on the way to its goal of conquering the modern commercial world. The e-commerce, logistics, media and food titan is now the second biggest company in the world and Morgan Stanley predicts it will overtake Apple by the end of next year to become the globe’s first USD1 trillion company. Australian institutions, particularly the banks, are yet to feel the full force of Jeff Bezos’ global colossus but with Amazon’s arrival in Australia, that is all about to change.

 THREE LESSONS FROM JEFF BEZOS

1. CUSTOMER OBESESSION.
At the core of Jeff Bezos’s leadership philosophy is the primacy of the customer. “Everything we’ve done, all the success we have, is at its root primarily due to the fact that we have put customers first” he says.

Amazon customers believe this as reflected in various metrics including its Net Promoter Score (NPS is a globally used and respected measure of the loyalty of an organisation’s customer relationships) of 61.

Further, Amazon is the second most admired company in the world, just behind Apple.

Our bank leaders also talk about the importance of putting the customer first but the key difference is that bank customers don’t believe the rhetoric. The average Net Promoter Score for the big four banks is -10 with the best (CBA) at -3 and the poorest (Westpac) at -15.

And not one of the big four Australian banks appears in BRW/Hays Group top ten admired companies.

It says a lot when the Treasurer of an unpopular government can gain easy political points by berating bank CEOs with the put-down that “your customers don’t like you very much”. It seems bank CEOs are even less popular than politicians.

Banks seem to be obsessively focussed on each other – witness the recent move by CBA to remove ATM fees which was followed within 24 hours by the other three.

 “If you’re competitor-focused, you have to wait until there is a competitor doing something. Being customer-focused allows you to be more pioneering” says Bezos.

Here are four examples of where the banks wait for competitors or regulators to do something before they act.

1. Loyal existing home loan customers who don’t shop around. According to a recent report by Fairfax Media, this is costing customers nearly $5b a year.

2. Customers who have funds on deposit but don’t get paid any interest.

3. Open data. Customers believe that data about their banking records belongs to them and they want banks to embrace not frustrate open data.

4. Unfair terms in standard form contracts. Banks have taken advantage of their dominant bargaining position to impose unreasonable restrictions on customers who have little bargaining power.

Globalisation and technology are re-weighting this power imbalance. According to Bezos “the balance of power is shifting toward consumers and away from companies..… The right way to respond is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it.”

2. GROW, GROW, GROW.

Amazon is obsessed with driving growth from new customers, products and markets. Last quarter it had revenue of USD43b and this quarter it is expected to exceed USD55b.

The Amazon approach to growing customers is a simple cycle – cut prices to attract customers, which increases sales and attracts more customers, which allows the company to benefit from economies of scale until, ultimately, the company can cut prices again.

As an example, as soon as Amazon spent USD13.7b to acquire Whole Foods it cut some prices by around 40 per cent. Whole Foods is now selling a range of Amazon products and services through its 431 stores.

In recent times banks have used strategies like increasing fees and cutting costs in order to maintain profits and dividends. Bezos says “there are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second.”

Invention is another key plank of Bezos’s philosophy. Amazon uses the internet to get maximum leverage from its fixed assets, and once it achieves enough volume of sales, the sum total of profits from all those sales exceed its fixed cost base, and it turns a profit.

Amazon is the ultimate scalable business. Amazon Web Services is the biggest cloud computing company in the world. The internet enables Amazon to quickly and successfully expand around the globe. It is now in 13 countries and employs more than 300,000 people and 45,000 robots to ship 1.6m packages a day.

Amazon dominates US online retail sales with a market share of 45 per cent. Given that 90 per cent of US retail sales are still made via bricks and mortar stores, the upside is enormous. Amazon has invested heavily in infrastructure too and now 44 per cent of Americans live within 32 km of an Amazon warehouse or delivery station hence their ability to offer fast delivery times.

Half of the households in the US subscribe to Amazon Prime which for USD5.99/month gives them services including steaming, video, music, e-books, free shipping & other deals.

Meanwhile our banks are getting smaller. They have retreated from failed off-shore operations and they’re offloading peripheral businesses like wealth management and insurance. A former CEO NAB was fond of remarking  “I have never seen an organisation shrink to greatness” but that appears to be exactly what the big four banks are now trying to achieve.

3. LONG TERM VISION WITH EXECUTIVE REMUNERATION ALIGNED

Of course, its easier call the shots when you are the Executive Chairman, the founder and major shareholder but Bezos’ priorities have always been upfront – “if we take care of customers, the stock will take care of itself in the long term.”

Amazon has never been about profits, its all about growth. “If you’re very clear to the outside world that you’re taking a long-term approach, then people can self-select in” he says.

Clearly analysts and investors are buying this story. Wall Street analysts are almost unanimous in their “strong buy” recommendations notwithstanding traditional metrics which show:

  • PE Ratio is 230 and based on 2019 forecast it is still 75
  • ROE is 9 per cent and average over last 5 years is 5.5 per cent
  • Yield is 0 per cent – Amazon doesn’t pay dividends

Last year Bezos was not Amazon’s highest-paid employee. He received USD1.681m in total compensation of which USD81k was salary. Yet because he still owns 17 per cent, he is now the richest man in the world with a net worth of USD93b.  Bill Gates is worth USD89b and Warren Buffett USD74b.

That’s a pretty good alignment of interest. Contrast this to ANZ’s former CEO Mike Smith who was paid $88m over 8 years when the share price actually fell during that period and his major strategy of expanding into Asia was immediately undone by his successor.

Australian bank bosses are paid huge sums regardless of shareholder return and their focus is excessively skewed to the short term. None have ever stood up to the markets like Bezos has and remember Bezos has talked like this from the onset.

AMAZON HAS THE BANKS’ ATTENTION & WITH GOOD REASON!

It’s only a matter of time before Amazon takes on Australia’s banks. Any market structure in which a small number of firms has the large majority of market share is at risk of being disrupted.

The four big banks are a similar size, they are cumbersome and are weighed down by antiquated ways of doing business. Despite or perhaps because they have shared the spoils of the banking market for over 25 years, their offerings are indistinguishable.

Australian banks still generate very acceptable ROEs around 14 per cent. Meanwhile, globally the banking industry’s ROE remains around 8 per cent to 10 per cent. This makes Australia’s banks even more attractive and as Bezos says “your margin is our opportunity.”

But Amazon wont tackle the banks head on, it will take them on where they are most vulnerable and where it can leverage its strengths including customer relationships, technology and data.

We only have to look at Amazon’s US banking activities to see where this is likely to be. It has a small-business lending arm that has already lent more than USD3b to more than 20,000 of the merchants on its e-commerce platform.

And it has a Visa credit card which rewards customers with benefits including 2 per cent discounts at restaurants, gas stations and drugstores. Meanwhile, Australian banks are winding back rewards from credit cards.

The banks are friendless. The Government’s popularity continues to decline and a banking inquiry or a Royal Commission now seems inevitable. No-one is going in to bat for the banks and repeated advertising campaigns are unlikely to shift public opinion.

It is worth noting the pronouncement by Keith Noreika, Acting Comptroller of the Currency (the agency that oversees US national banks) that “if a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so.

For the politicians and bureaucrats it is sinking in that the quickest and easiest way to increase competition in banking is not to try to get the banks to change but rather to make it easier for new entrants. And the big players like Amazon have a head start over the fintech start-ups because they have deep pockets, customers and data.

WHERE TO FROM HERE?
The Amazon lesson is that in this new age, customers are ultimately the ones who will make or break any business. If the overseas experience is anything to go by, Australian consumers will embrace Amazon and Australian businesses also have the opportunity to grow as Amazon grows.

But Amazon itself faces several risks including its reliance on Bezos. There is also the risk of competition from other goliaths like Alibaba, Apple, Alphabet, Microsoft and Facebook as well as the prospect of an entirely new player disrupting the disruptors.

If Amazon does end up conquering the modern commercial world, would that be a good thing? At what stage might the regulators form the view that Amazon has gained too much power? Will it be too late then to unwind this behemoth?

The banks know what they are up against and are already responding. They still have customers, strong balance sheets and track records and they employ lots of very smart people but they are going to have to move more adroitly than they have done in the past.

We can expect the banks to push for the unwinding of the Four Pillars Policy to enable them to merge thereby reducing costs to better compete with the likes of Amazon.

One thing is for sure Jeff Bezos and Amazon have shown us all just how quickly the world of commerce is changing and the banking market is no exception.

Re-posted with permission.

Turnbull backed against the wall by rebel Nationals on bank inquiry

From The Conversation.

Prime Minister Malcolm Turnbull and Treasurer Scott Morrison appear to have become hostages to rebel Nationals determined at all costs to secure a commission of inquiry into the banks.

On Monday a second federal National, Llew O’Brien, from Queensland flagged he is likely to cross the floor in the House of Representatives to support the private member’s bill sponsored by Queensland Nationals senator Barry O’Sullivan to set up a commission of inquiry that would investigate a broad range of financial institutions.

O’Brien, who has inserted an extra term of reference to protect people with mental health issues from discrimination, said “I like what I see” in the proposed bill. But he added that he would respect his party’s process. The bill is due to go to the Nationals party room on Monday.

The bill, which has the numbers to get through the Senate, is supported in the House by Queensland Nationals George Christensen, who after Saturday’s Queensland election apologised to One Nation voters for “we in the LNP” letting them down.

Backed by Christensen and O’Brien, together with Labor and crossbenchers, the bill would have the required 76 votes to enable its consideration by the House – although when it can get to be debated there is not clear.

In a discussion last week – later leaked – cabinet considered whether the government should adopt a pragmatic position and give in to calls for a royal commission. But Turnbull and Morrison have refused to do so.

Now the cabinet looks like it will have to decide whether to own the process of an inquiry or have it forced on it.

If Monday’s Nationals party meeting endorsed the bill, that would escalate the situation dangerously for the government, unless it had softened its opposition to an inquiry. It would amount to the minor Coalition partner formally rejecting a government position.

Cabinet would have to back down, or find some other way through.

As the crisis over the banking probe deepens for the government, there is currently no one with the authority or availability within the Nationals to manage the situation.

Barnaby Joyce remains leader but he’s absorbed in Saturday’s New England byelection, which is his path back into parliament. Senator Nigel Scullion is parliamentary leader but has little clout to curb the determined rebels.

With the commission push gaining momentum there is also less desire from some senior Nationals to fight it. Joyce is said to be relaxed about having a banking inquiry, which would be popular among voters and could be chalked up as a win for the Nationals.

The election loss in Queensland has strengthened the federal Nationals’ determination to pursue brand differentiation.

O’Sullivan has repeatedly referenced the example of Liberal Dean Smith’s use of a private member’s bill to pursue the cause of same-sex marriage, arguing he is following Smith’s pathway.

But there are still divided opinions within the parliamentary party about the bank probe. Resources Minister Matt Canavan, a member of cabinet, on Monday reaffirmed his opposition to a royal commission.

Joyce is likely to attend Monday’s party meeting although he will not be formally back in parliament by then.

Nationals are not clear whether they will elect their new deputy on Monday to replace Fiona Nash, who was ruled ineligible by the High Court because she had been a dual British citizen when she nominated. There is some speculation that this might be delayed to give aspirants time to lobby.

If there is no deputy leader chosen on Monday, it would mean that the minor party would be literally leaderless on the government front bench in the House of Representatives. Infrastructure Minister Darren Chester would be the most senior National sitting behind the Prime Minister in question time.

Christensen on Monday launched a website with a petition seeking signatures for a banking inquiry.

“Misconduct is not in the ‘past’”, he says on the site. “It is not being fixed by the industry to a standard acceptable to the community. Although positive steps are being made by government reforms, gaps still exist.

“Enough is enough…. unless the government acts to establish a Royal Commission, I will be acting before the end of this year to vote for a Commission of Inquiry into the banks.” The site also invites people “bitten by the banks” to ‘“tell your story”.

A commission of inquiry differs from a royal commission in being set up by and reporting to parliament, rather than being established by and reporting to the executive.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

NAB Will Remediate 2,300 Home Loans

NAB has said it has commenced a remediation program for some of its customers, after a review identified their home loan may not have been established in accordance with NAB’s policies.

It follows the completion of an extensive review by NAB which identified around 2,300 home loans since 2013 that may have been submitted without accurate customer information and/or documentation, or correct information in relation to NAB’s Introducer Program.

NAB first became aware of the matter in October 2015, and advised ASIC in December 2015 after an initial high-level review. Since then, NAB has provided regular updates to ASIC on the progress of its investigation.

“What occurred was unacceptable. We have investigated this matter thoroughly, and, as we have always said, whenever we find issues we will investigate them, fix them, and hold people to account – and we did,” NAB Chief Customer Officer, Consumer Banking and Wealth, Andrew Hagger, said.

As a result of NAB’s review, 20 bankers in New South Wales and Victoria had their employments terminated, or are no longer employed by NAB, and an additional 32 bankers had consequences applied including the reduction of remuneration.

NAB has commenced writing to the around 2,300 customers – many of whom live overseas – asking them to participate in a detailed review of their loan, which may include verification of documents submitted at the time of their home loan application. Affected customers may be offered compensation as appropriate.

NAB has engaged with ASIC to ensure the remediation program provides fair outcomes for customers. The remediation program has been designed with reference to the methodology applied by the Financial Ombudsman Service, and with NAB’s standard approach to compensating customers. NAB will engage an independent expert to undertake regular audits of the remediation program, and will update ASIC every two months on its progress.

“I want to assure all of our customers that we have improved our systems, processes and programs as a result of what occurred here,” Mr Hagger said.

This includes changes to NAB’s Introducer Program, including enhanced governance and eligibility criteria.

Customers who receive letters to participate in the remediation program are encouraged to contact NAB on the phone number provided to them. Any NAB customer who is not part of the remediation program, but who has a query about it or their home loan, can contact NAB