The Banking Royal Commission was set up in 2017 to inquire into and report on misconduct in the banking, superannuation and financial services industry. Orbium’s Country Manager in Australia; Christian Schneeberger looks at the impact of this commission and the forthcoming report.
Banking in Australia
Banking in Australia is dominated by four major banks: Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB).
The four major banks are among the world’s largest banks by market capitalisation and all rank in the top 25 globally for safest banks. They are also some of the most profitable in the world. Australia’s financial services sector is the largest contributor to the national economy, contributing around $140 billion to GDP a year. It is a major driver of economic growth and employs 450,000 people.
Financial regulation in Australia is split mainly between the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA).
ASIC has responsibility for market integrity and consumer protection and the regulation of investment banks and finance companies. However, in practice, it manifests this function in the oversight of External Dispute Resolution schemes (EDRs). There are two ASIC approved EDRs currently operating in Australia. The most prominent is the Financial Ombudsman Service (Australia) (FOS) which receives over 30,000 complaints per year. The second is the Credit and Investment Ombudsman (CIO), which received 4,760 complaints in the 2015/16 financial year. Both the FOS and CIO are not for profit, non-governmental organisations funded by members including banks, financial advisers and other financial service providers. Thus, Banking regulators have a significant private and self-regulatory element.
APRA is responsible for the licensing and prudential supervision of Authorised Deposit-taking Institutions (ADIs), life and general insurance companies and superannuation funds. All financial institutions regulated by APRA are required to report on a periodic basis to APRA. APRA has issued capital adequacy guidelines for banks which are consistent with the Basel II guidelines. Investment banks (which do not otherwise operate as ADIs) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. However, most investment banks are required under the Financial Sector (Collection of Data) Act 2001 to provide statistical information to APRA.
The Australian Competition and Consumer Commission (ACCC) regulates anti-competitive behaviour.
Banking Royal Commission
What and How
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, also known as the Banking Royal Commission, is a royal commission established in 2017 by the Australian government pursuant to the Royal Commissions Act 1902 to inquire into and report on misconduct in the banking, superannuation and financial services industry. The Commissioner will provide a final report by 1 February 2019.
The Commission invited individuals or entities to make public submissions using an online form. The role of the Commission was not to resolve individual complaints, but to come to an understanding of the systematic failures that may have led to the complaint occurring.
The Commission has issued several background papers that provide more details on certain aspects of the industry. It also conducted a number of public hearings that focus on the following topics:
Round 1. Consumer Lending Practices
Round 2. Financial Advice
Round 3. Loans to small and medium enterprises
Round 4. Issues affecting Australians who live in remote and regional communities
Round 5. Superannuation
Round 6. Insurance
Round 7. Policy questions arising from the first six rounds
It is important to understand that the Banking Royal Commission has limited power. It can make recommendations, but cannot order any form of compensation to customers.
And irrespective of the Banking Royal Commission the problem for the Australian banks today is that the two major growth enablers (deregulation and lower interest rates) of recent decades have either stalled or even started to reverse.
Further regulatory action is one of the four areas where the risks from the Royal commission lies. The others are potential fines, changes to remuneration structures away from a sales focus to softer targets, and changes to commission structures for broker networks.
After cracking down on growth, the focus from APRA will potentially turn to risk management. Internal risk processes will be reviewed, most likely at a cost to the banks.
These cost increases will eventually (need to) be offset. The banks have already started undertaking job cuts over the recent years. Over the two years from 2015 to 2017, ANZ reduced their staff numbers from 50,152 to 44,896. Meanwhile, NAB has recently announced plans to reduce their workforce by a net 4,000 employees out of a total of 33,422. Banks have reduced their cost to income ratios significantly over the last 25 years dropping from above 60% to close to 40% with technology being the key driver.
Increased regulation will continue to put pressure on the banks profitability. Orbium can help you both in dealing with regulation and risk management as well as increasing your profitability based on our experience of the Australian market across multiple financial institutions.