The federal government caved in to political pressure and agreed on a royal commission into the industry after the big four banks changed their tune and through their support behind the idea.
The surprise turnaround from Canberra came after a joint letter to the government from the big four banks supporting an inquiry.
The crux of that letter was summed up in this:
"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 … 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.”
That completely blindsides Malcolm Turnbull and the Treasurer, Scott Morrison.
It also blindsided investors who responded by selling off bank shares from the opening of the ASX at 10am. CBA shares off 2.4%, Westpac 1.7%, ANZ 1.3% and NAB 1.2%.
The fact that the CBA’s loss was the largest was an immediate judgement that it has to most to lose from any inquiry with its long history of dudding customers, consumers and regulators (as per the Austrac money-laundering case).
The wider market was down more than 50 points, with most of that due to the slump in bank shares.
The selling eased off as the day went on and bank shares closed with smaller losses while the ASX 200 ended down 0.7 or 41 points.
The CBA was off 1.9%, the NAZ was down 1%, Westpac down 0.03% but the NAB ended a tiny 0.03% higher!
The bottom line is we have a Royal Commission with a $75 million budget and a tight 14 month timeline which puts the final report in the early months of 2019, which is a Federal Election year.
That means newspaper and TV headlines will be dominated in 2018 from time to time to whatever emerges from the inquiry. Investors will have to factor that into their view of the coming year.
Global credit rating agencies say they expect limited fall out in debt markets from the banking Royal Commission but warned if new issues emerge they could be forced to revise their assessment of the major banks.
Moody’s banking analyst Frank Mirenzi told The Australian Financial Review a royal commission in its proposed form would “have some potentially short term negative impacts but long term positive impacts,"
"In the very short term potentially there is some waning in investor confidence from the headline risk if nothing else and that may translate into some higher level of funding costs," Mr Mirenzi said.
Standard & Poor’s banking analyst Sharad Jain said there was no reason to believe there were serious issues but that was for the inquiry to determine.
Treasurer Scott Morrison attempted to gain cover on the turnaround by saying the governor of the Reserve Bank and the chair of the Australian Prudential Regulation Authority had advised him of the damage being caused by the speculation — much of which was entirely the product of the government itself and its inability either to control the House of Reps, or its own restive backbenchers, especially the National Party.
But that exempts Senator John Williams. The National party Senator has long campaigned for an inquiry into the banks, especially the Commonwealth from the time of the Storm financial scandal nearly a decade ago.
The inquiry will be the largest investigation of the banking and financial services sector in Australian history, with powers to examine all cases of “misconduct,” including breaches of professional standards across the insurance, banking and superannuation sectors.
The inquiry into financial services – which is Australia’s largest industry making up around 10% of the economy – will focus on “any conduct, practices, behaviour or business activity that falls below community standards” and “the use of superannuation that is otherwise not in the best interest of members”.
Unions will be forced to face the commission alongside the executives of financial firms such as banks and insurance companies under the terms of reference, as industry super funds come under the spotlight over how they have invested their members funds.
The government’s terms of reference do not specify an investigation into the pay packets of bank executives or protections for whistleblowers, but are sufficiently broad for these areas to be investigated if needed.
Retired High Court judges Robert French, Ian Callinan and even Michael Kirby all have the credentials to be chief commissioners. All three have experience in banking and financial law.
As a royal commission it will be given the power to compel witnesses to give evidence under oath, and make it an offence to fail to attend or produce documents to a royal commission; or to conceal, mutilate or destroy any documents.
It will be able to refer matters to the Director of Public Prosecutions, followed by criminal prosecutions.
