Will the banking royal commission achieve anything?

When the Turnbull Government announced the royal commission into the banks, superannuation and financial services industry on November 30, it promised a “sensible, efficient and focused inquiry into misconduct and practices falling below community standards and expectations”.

But Australian Centre for Financial Studies Research Director and Professor of Finance at Monash Business School, Kevin Davis, argues that areas to be investigated under the draft terms of reference may prove too vague to be of practical use.

For instance, the first term of reference asks whether misconduct can be attributed “to the particular culture and governance practices of a financial services entity”.

“Proving beyond reasonable doubt that misconduct or immoral or unethical practices are the result of particular aspects of an institution’s culture is a hard task,” he says. “And how can you then identify how to improve them?”

A related issue is “to what extent are you looking at an institution, rather than people within the institution?”.

Professor Davis has previously argued that “royal commissions are likely to work best when there is one specific major issue to be addressed or where there is some substantive matter of policy formulation on which a primarily legal, inquisitorial analysis can shed light”.

But the circumstances that have led to calls for the banking royal commission have been diverse. They include revelations that the Commonwealth Bank insurer, CommInsure, took extreme steps to avoid making payouts; the millions lost by Commonwealth Bank financial planning customers; accusations that the Commonwealth Bank breached money laundering regulations; and, most recently, inaccurate or incomplete documentations for home loans at the NAB.

The Turnbull government announced the royal commission after the National Party joined calls by Labor and the Greens for an inquiry into the banks. Mounting pressure for an inquiry led the banks themselves to join the call – with the Prime Minister admitting that this influenced his decision to hold the royal commission.

Australian royal commissions have often been politically useful vehicles for airing public grievances, but have proved less efficient at solving problems. Professor Davis speculates that “the banks have said bring it on” because “this way you have one particular inquiry, rather than 10 different responses and 10 different inquiries” to deal with.

Professor Davis has previously recommended that the directors of banks be required to put the interests of their depositors ahead of their shareholders – a similar provision exists in the insurance industry, with priority going to policy holders.

“For banks, most of their money comes from depositors … they are using other people’s money.” Although most of the complaints against the banks have come from the “loan side”, he says that questionable banking practices are distressing to the bulk of people whose savings are in banks. “There’s a divorce between the bank’s customers and its governance.”

Professor Davis was a member of the Australian Financial System Inquiry led by David Murray, which in 2014 made many recommendations, including how to improve “outcomes for consumers of financial products”. The government accepted most of the Murray inquiry’s recommendations, although their implementation and effects are still working their way through the system – potentially complicating analysis by the royal commission.

The Turnbull government has created an Australian financial complaints authority to resolve disputes; provided funding for the Australian Competition and Consumer Commission to regularly inquire into financial system competition; and imposed bigger fines for banks that breach the rules.

Professor Davis also notes that the draft terms of reference bring the issue of superannuation governance to the fore and will further inflame the ideological debate over governance arrangements in retail versus industry funds. (They say the commission will inquire into “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”.) He notes that some commentators have recently referred to “rivers of gold” of fees paid to unions for services of their officials as trustees on superannuation boards (while omitting any comparison with the size of trustee remuneration by retail funds).

Broader questions regarding the “culture” of the banking, superannuation and financial services industry and practices that “do not meet community standards” are worth asking, he says. But they are better suited to a research agenda that can delve into the more philosophical aspects – what is meant by ‘culture’ or ‘community standards’, for instance – than to the legal definitions and practical solutions required by a royal commission.