Bad apples: what would a banking inquiry look like?

Commonwealth Bank CEO Ian Narev

No one likes the big banks so it’s easy to make the case for a royal commission.

But with so many scandals, it’s hard to know where an inquiry would begin … and end.

As Nationals Senator Barry O’Sullivan drafts a private member’s bill for a commission of inquiry into the sector, here’s a look at some of the things an inquiry might actually cover.

Bad apples or a rotting orchard?

The banks have been slammed over the past five years over rolling scandals that they keep promising to fix but never stop. While this has been the trigger for calls for a royal commission, it might not necessarily be the focus. The politicians calling for a royal commission don’t want to pick over old scandals, they want to uncover new ones. The terms of reference are likely to reflect this. While banks have been keen to take the bad apple defence, an inquiry will likely look at the systems that encourage workers to bend and break the rules. These include cross-selling and bonuses paid to staff.

Too big to fail, too big to regulate … maybe just too big

Australia’s big banks are bigger, more complex and more profitable than ever before. This is thanks to an acquisition spree in the 1990s and 2000s that saw the big four suck up their smaller competitors. They have gone from simply giving out loans, cheque books and credit cards to dominating every aspect of finance, from insurance and superannuation to global share trading.

Now, even the banks themselves admit they have gotten too big, with many choosing to flog off troubled insurance and wealth divisions. But this untangling will be messy and raises more questions about accountability for past wrongdoing.

An inquiry would likely look at ways to break up the banks further, not only to improve competition but to make them less complex and easier to govern.

UTS professor of management Thomas Clarke says the concentration, scale and integration of Australia’s banks is of far greater concern than any scandal.

“Financial institutions are taking a disproportionate share of the profits of the economy, and the productivity of the economy is weaker as a result,” he says. “Finance needs to be put in its place rather than being the driver of so much of our economy and society.”

Greater supervision needed

Australia’s corporate cops have been caught asleep at the wheel far too often, and previous inquiries haven’t seemed to make a difference. After the Commonwealth Bank financial planning scandal broke in 2013, the Senate launched an inquiry – not into the CBA but into the performance of the corporate regulator, the Australian Securities and Investments Commission.

What it uncovered was a regulator that lacked scepticism and “allowed itself to be lulled into complacency” by the banks. Indeed, ASIC’s response and the bank’s behaviour was so appalling, it said, that it warranted a royal commission.

More than four years on and ASIC has found itself in the dark once again, this time over the CBA money laundering allegations that happened more than two years ago.

Australia can’t afford to have such highly complex, super-sized banks be governed by a weak and diminished regulator. Therefore the role of ASIC and its banking counterpart, the Australian Prudential Regulation Authority (APRA), will no doubt come under more scrutiny – a tough job for incoming ASIC chairman James Shipton.

No protections for small business

If you think mum and dads have been hit hard by banking misconduct, spare a thought for small businesses, who have next to no protections against bank wrongdoing compared to ordinary consumers. It’s because of this gaping hole in regulation that small businesses, including farmers, have been amongst the hardest hit by the scandals of recent years.

While a recent small business inquiry has sparked some changes in this area, a royal commission or commission of inquiry would address past cases of wrongdoing that have slipped through the cracks.

But Australian Small Business and Family Enterprise Ombudsman Kate Carnell says any inquiry would only prompt legislative change, and not bring about compensation.

“These are people who have been through extraordinary amounts of problems, personal and private. They have been seriously messed around [by the banks],” she says.

“Nobody knows how many cases there might be, but it is important for people involved to know that a inquiry can only make recommendations and cannot give compensation.”