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Royal Banking Commission (II) - February 2019

In the first poll of 2019 – following on from our Banking Royal Commission poll last year about the risk of a credit squeeze, and before the Commission’s Final Report was released – our panellists were asked for their opinions on the following proposition:

"There is no way to significantly increase the degree to which Australian retail banks act in the interests of consumers."

Clearly this is an extreme proposal. Rather than proposing a single policy intervention this poll was designed to draw out a diversity of views and comments.

Overview of poll results

Read the overview by Professor Gigi Foster and Professor Paul Frijters

Collaborator credits: we would like to thank our panellists Professor Gigi Foster and Professor Paul Frijters for proposing this question and for their expert overview of the results.


Responses (20)


 

Garry Barrett

Strongly disagree

9


 

Matthew Butlin

Disagree

8

The incentive structures for bank staff, from the top down, play a key role in shaping behaviour. A more complete set of performance measures linked to remuneration that strongly penalises behaviour not in the consumer interest would provide stronger incentives for better behaviour, especially when linked with reliable information on non-compliance going to management and ultimately the bank board and a requirement for both to take action.


 

Deborah Cobb-Clark2

Strongly disagree

8


 

Brian Dollery

Strongly disagree

8

Numerous methods exist that can oblige banks to act in the public interest. For example, prudential regulation on mortgages can be adjusted to tighten lending and reduce mortgage default rates. Similar, legislation can beenacted obliging banks to be transparent on fees and charges.


 

Uwe Dulleck

Disagree

9

I am not sure that the regulation of financial services and products will do the trick, but outcome/performance based regulation would make a difference. We can identify underperformance and publish observations and regulate minimum performance (ruling out clear misconduct, selling dominated products) is doable for a large share of customers.


 

Chris Edmond

Strongly disagree

8


 

Allan Fels

Strongly disagree

7

I believe that a great deal can be done to increase the degree to which Australian retail banks act in the interests of consumers. Quite strong and comprehensive measures will be required. The following are the most important: There should be a legislated separation of bank activities in marketing their own products and in purporting to provide independent advice to customers about what are the best products on the market as a whole. There needs to be an external authority to monitor and supervise the bank handling of remediation. The remuneration systems of financial institutions have got out of hand. The best starting point to this complex matter is to prohibit commissions and percentage payments and the like and to replace them with a fee for services e.g. an hourly fee for advice. We need a radical improvement in the performance of ASIC and APRA. In particular they need a change of culture. This will prove to be harder to do than it sounds. People have been talking for over twenty years about the ASIC and APRA culture needing improvement. Similarly there needs to be a change of culture in the banks. This will also be quite difficult and requires a radical overhaul of everything from Board membership; to new management arrangements; and to the establishment of incentives for good customer oriented service etc. There needs to be a strong follow-up to the Hayne Commission by the government. This also presents major problems. I do not have great confidence in politicians fixing the problems. The capability of government departments, even the Treasury department, is somewhat limited in relation to the scale of problems they will encounter. I am not enthusiastic about setting up a raft of new Commissions nor am I confident that the established regulatory constitutions on their own can solve the problems while so many difficulties lie ahead. Even so, I believe that significant changes can and will occur. The Royal Commission hearings, processes and report are themselves important drivers of cultural change. These comments are made on the day before the final report of the Royal Commission.


 

Gigi Foster

Disagree

7

There are ways to do this, but they have so for proven infeasible for political reasons. Some options are: (1) the (re-) creation of a state bank, whose remit is to handle basic banking and mortgage services, leaving only the complex and high-margin business for the retail banks to compete over (this reduces the welfare take of retail banks overall, while concentrating the take that remains amongst Australia's richest consumers and businesses); (2) the introduction of third-party regulation of banks, ideally by international parties that have no financial or political stake in the outcome of their reviews; (3) government subsidization and coordination of Australian consumers' access to overseas providers for particular services that are particularly over-priced or unavailable here, such as superannuation management or educational savings management. What you need is either to increase competition for the business that Australian retail banks presently hold a joint monopoly on, and/or to authorize a dispassionate party to (at least temporarily) take away the right to trade from retail banks shown to be gouging consumers.


 

Lata Gangadharan

Disagree

9

Policies that focus on accountability would help. Most importantly though some attention needs to be paid to the contracts and incentives given to financial managers. These contracts (salaries and bonuses) could explicitly include improvements in consumer welfare, rather than just be conditional on an increase in profits for the banks.


 

Prue Kerr

Disagree

6


 

Geoffrey Kingston

Disagree

6

A big part of the monopoly power of the established banks has been their informational advantage over other interested parties. The big data revolution is helping to overcome this by enabling non-established lenders to access cheap information on potential borrowers, especially small-business ones. Another cause of the problems is reluctance on the part of the courts to jail white-collar criminals. Mandatory minimum sentences could help.


 

Tony Makin

Disagree

8

The Royal Commission's exposure of unacceptable banking practices has been a major wake-up call for commercial banks, and, hopefully, Commissioner Hayne's recommendations will significantly improve their treatment of consumers. If not, the RC was a major waste of time and money. Banks now face greater public scrutiny than before, and there's an incentive for them to repair their tarnished reputation.


 

Flavio Menezes

Strongly disagree

10

The tension between financial stability and competition is well-understood. More stringent prudential regulation, arising from the desire for greater financial stability post-GFC, raised barriers to entry, reducing competition. However, it is unclear that the type of behaviour displayed by banks, and uncovered by the Royal commission, can be explained by the reduction of competition alone. It follows then that measures to increase competition, such as those that reduce switching costs, may not be enough to protect consumers.


 

James Morley

Strongly disagree

10

There are many ways to change incentives for banks. One would be to separate out retail banking from other financial services, as under Glass-Steagall for the US from 1933-1999. Another would be to explicitly mandate that bankers should act in the interest of retail clients and have severe sanctions for failure to do so (e.g., loss of banking license if found by the regulator to have deliberately acted against the interest of retail clients). The list could go on.


 

John Piggott

Disagree

7


 

John Quiggin

Disagree

6

None of the options that have been proposed so far are likely to do much good. What is needed is a reversal of the massive expansion of the financial sector that began in the 1970s. In the banking context, this would entail a "narrow banking" model in which retail banking was separated from trading and investment banking and regulated as a public utility, along with the recreation of a publicly owned "no frills" bank, along the lines of Kiwibank in New Zealand. These proposals may be beyond the realm of political feasibility, which is why I have expressed only modest confidence in my view.


 

Jeffrey Sheen

Strongly disagree

8

Clearly a false proposition. Any company in any industry has multiple stakeholders, including shareholders, customers, workforce, suppliers, management, government and society-at-large. Successful companies that survive over the longer term manage well the balance between the interests of their different stakeholders. Regulation plus supervision can always be introduced to force a company to adjust the attention given to any particular stakeholder, but this should not go beyond a minimal set of transparent requirements about ethical, legal and competitive practices. Heavy-touch interventions that go beyond will have unintended side effects and will be welfare-reducing. The retail banking sector is not a special case in this regard - the issue applies generally across the finance sector as well as many other industries. Our retail banks significantly enhance social welfare, and should be held accountable but not demonised for the misbehaviours identified in the Hayne Royal Commission.


 

Joaquin Vespignani

Disagree

8

Increase competition: I believe that more competition from international banks is a key factor to improve good behaviour from domestic banks as in general international banks have tighter internal regulations to ensure all branches worldwide complaint with domestic regulations. The concentration of the financial industry in Australia is not helpful to protect retail consumers. Refine regulations: We all know that regulations and markets are not perfect, and constant review of good practices is a key element to ensure better consumer protection. Although, misconduct exist in almost any sector; it is important to note that things have improved substantially over the long period. In this sense is important to have historical perspective.


 

Rachel Ong ViforJ

Disagree

8


 

Beth Webster

Strongly disagree

9

It is a matter of changing the business culture first by making it easier to punish banks who clearly violate codes of ethics and integrity. Second by making the senior management more accountable for the incentives they create in their organisation and the conduct of their employees.