Australia is to hold a royal commission into the finance industry

2/08/2018

In what looks like a climb-down by the prime minister, scandal-plagued banks will be probed for alleged misconduct

MALCOLM TURNBULL, Australia’s prime minister, has changed his tune. Just last week he dismissed calls for an inquiry into Australia’s banks, saying it would be an expensive exercise that “doesn’t do anything other than write a report”. But on November 30th, Mr Turnbull abruptly announced a royal commission, Australia’s most wide-ranging form of inquiry, into “alleged misconduct” not just by banks but in other financial services as well.
Only hours earlier, Australia’s four biggest banks—the Australia and New Zealand Banking Group, the Commonwealth Bank of Australia, the National Australia Bank and Westpac Banking Corporation—had themselves called for an inquiry. Their chairmen and chief executives wrote to the federal government asking for an inquiry to end uncertainty and “restore trust, respect and confidence”.

Australia weathered the financial crisis a decade ago without a recession—indeed in 2018 it is poised to enter its 27th consecutive year of unbroken expansion. Its resilience was seen as, in part, a consequence of sound banking regulation. But in recent years, a series of scandals has fed a different image. The press has exposed stories of customers losing savings after following poor financial advice from banks. Many Australians have come to see banks as pursuers of big profits and fat executive salaries at the expense of service to ordinary customers. In August the Commonwealth Bank faced accusations from a regulator of turning a blind eye to money-laundering through its deposit machines. This only heightened calls for an inquiry into the entire industry.
The banks’ call for one came after political pressure had been mounting on Mr Turnbull’s conservative coalition government. Barry O’Sullivan, a federal senator from the rural-based National Party, the coalition’s junior partner, had threatened to introduce a private member’s bill for a parliamentary commission of inquiry. Its powers would not be as broad as those of a royal commission. The Labor opposition, the Australian Greens and independents had offered support, ensuring it would pass the Senate. That left Mr Turnbull politically vulnerable. He survives in the lower house with a one-seat majority. He could have lost that if rebellious Nationals there had helped to pass the bill, too.
By writing to the government as this political drama flared, the banks seemed to have seized the high ground. Political uncertainty, they said, was “hurting confidence in our financial-services system, including in offshore markets”. It also risked “undermining the critical perception that our banks are unquestionably strong”.
After the banks’ intervention, Mr Turnbull appeared at a press conference in Canberra with Scott Morrison, the treasurer. He called the decision to call the royal commission a “regrettable but necessary” one. Echoing the banks, he said that uncertainty about an inquiry was “starting to undermine confidence in our financial system and, as a result, the national economy”. The Royal Commission into Misconduct in the Financial Services Industry (as it is called) will be headed by a judge, or a former judge, yet to be appointed, cost A$75m ($57m) and will be expected to report in February 2019.
Mr Turnbull, himself a former banker who once headed Goldman Sachs in Australia, showed a touch of defensiveness over the apparent climb-down. He said the inquiry would not be putting “capitalism on trial”, nor should banks be used as “political football”. They were the “bedrock of the economy”, employing more than 200,000 people.
Mr Turnbull says the royal commission will ensure a “responsible but comprehensive” investigation into how financial institutions have dealt with past misconduct, and whether those cases expose “cultural and governance issues”. Pension funds, insurance companies and other wealth managers will be included.
The Labor opposition had already promised to hold a royal commission if elected. The government had tried to head off this pressure by showing it understood people’s grievances. When he spoke at an event to mark Westpac’s bicentenary last year, Mr Turnbull turned on banks, saying they should “put their customers’ interests first”. In its budget last May, the government imposed a levy on Australia’s five biggest banks to raise about A$1.5bn a year. Now that he has been unable to avoid an inquiry any longer, Mr Turnbull will have to prepare for the potential political fallout from having put it off. The bankers must brace themselves too. One senior financial-industry executive predicts the inquiry will be an “unpleasant experience”.