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Behind The Banking Royal Commission

Most of us have a pretty clear understanding of where banks fit in our lives.

Unless you’ve made a bucket of money, most of us will need to front up to a bank at some point and kindly ask to borrow money.

It might be to buy a house, a car, or simply to help put kids/grandkids through school. Whatever it is, most see it as a purely commercial deal.

Quite why banks seek to pretend the relationship is deeper than this confounds me. Whatever glossy spin they put on things, their job is to make money out of money. We get it.

Without us, they have no one to lend to. And without them, we have no way of raising the required funds on our own — almost none of us would own our homes.

The upcoming royal commission into the banking sector will no doubt throw up some of the unsavory parts of banking. Many of these we already know about.

However, there is likely to be new revelations as well. Sadly, while some of these might shock us, they are unlikely to surprise.

Unfortunately for victims, one thing the royal commission can’t do is offer compensation. All it can do is offer recommendations — it’s up to the government to follow through.

They knew it was coming

Don’t think for a moment the banks aren’t prepared.

While all the political shenanigans have gone back and forth, the banks have been combing over their records to see what else is out there.

When the bank executives front up, there is every chance they’ll know about, and be prepared for, whatever comes their way.

While the royal commission will cost taxpayers around $75 million, the banks will collectively spend many times that amount. In the scheme of things, though, that’s small fry compared to the profits they generate.

But while the banks were expecting a royal commission — in the end asking for one — there is one thing they did not anticipate. And that was the government expanding the royal commission to include superannuation.

With the size of funds on offer, the under-pressure banks suddenly smell an opportunity.

Industry versus retail funds

The banks have been slugging it out with industry super funds for decades. And like all things financial, it all comes down to money.

Both retail and industry funds charge fees to their members. However, because financial institutions (such as banks) own retail funds, they need to make a profit. By comparison, industry funds are not-for-profit so they can charge less for their services.

That aside, Australia’s $2.3 trillion superannuation pool is one of the world’s great gravy trains. With compulsory super contributions at 9.5%, it’s a pool that compounds year after year. That’s why both industry and retail funds fight (lobby) for every inch they can get.

This fee pool is all about the size of funds under management. Note that it is not performance based. It’s a pool financial institutions, particularly the banks, want to get their hands on.

Each year, the size of the pool — and therefore the fees — continues to get larger. Who would not want to be part of this action?

For banks facing a softening in the property market, it could spur their next phase of growth.

While the spotlight has been on the banks and their dealings, what the public will want to see is how the superannuation industry stacks up. Is anything unsavory likely to come out?

Like any other financial product, superannuation should be about transparency and choice. Perhaps we do have one of the best superannuation schemes in the world. Or maybe we are all being slugged too much for what we get.

With 12 months set for the royal commission, let’s just hope we find out before the lawyers run out of time.

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