Australian banks set for biggest upheaval from probe

Bloomberg

Australia’s scandal-plagued banks are set for their biggest upheaval in decades as a wide-ranging inquiry into misconduct recommends how the nation’s financial industry should atone for wrongdoings.
In its final report to be released in Canberra, the government-appointed Royal Commi- ssion could propose financial firms be broken up to avoid conflicts of interest, push for changes to pay and bonuses, tighten lending standards, urge tougher action from regulators, and even push for charges against banks, senior executives.
Bank earnings could be dented by increased compliance and customer-compensation costs and recommendations for lower fees, while the impact could flow on to the broader economy. Prime Minister Scott Morrison warned of “serious consequences” if the findings spark a credit freeze, making it harder for homebuyers and businesses to borrow.
During 68 days of hearings, and in more than 10,000 public submissions, the inquiry exposed a laundry list of misconduct, from charging dead people for services, lying to regulators, and pushing people into poorly-performing products to meet bonus targets. Commissioner Kenneth Hayne’s interim report assailed banks for putting profits before customer interests, saying misconduct was often driven by “the pursuit of short-term profit at the expense of basic standards of honesty.”
The inquiry has already started to reshape the industry. Most of the big-four banks are looking to sell their financial planning units, where most of the problems occurred; have tightened lending criteria, and cut fees. The CEO and chairman of wealth manager AMP Ltd. quit, while National Australia Bank Ltd. overhauled its executive team and pay structure.
The fallout has also hit investors, with the big-four banks — which account for 22 percent of the benchmark index — losing a combined A$64 billion ($46.4 billion) in market value since the inquiry was announced. Shares of AMP, whose reputation was shredded during the hearings, have plummeted more than 55 percent in the past year amid plunging earnings and spiraling remediation costs.

Industry Structure
In his interim report, Hayne criticized the advent of the “one-stop shop,” where financial firms offer everything from banking services to advice to wealth management. While promising the virtues of efficiency, “the one-stop shop has an incentive to promote the owner’s products above others, even where they may not be ideal for the customer,” he wrote.
That has stoked speculation he may recommend financial planning be separated from wealth management. “This could drive the most significant change at AMP and IOOF,” the nation’s two largest financial advice providers, said Sharnie Wong, a senior analyst at Bloomberg Intelligence.

Lending Standards
One of the biggest effects of Hayne’s recommendations could be a further squeeze on credit. In his interim report, Hayne took the banks to task for lax lending standards — from failing to verify borrowers’ income and expenses — to failing to comply with responsible lending laws. UBS Group AG analysts have estimated that a move to full expense verification by banks is likely to reduce maximum borrowing capacity by about 30 percent.
Banks have already tightened loan requirements, which has been cited as one of the main reasons behind the rapid decline in home prices. Even tougher standards could deal a further blow to the soggy housing market. Nationwide home prices have fallen 5.6 percent in the past 12 months, according to CoreLogic Inc.

Remuneration
Bankers could be hit where it hurts the most: their hip pocket. At the heart of most of the misconduct was greed, Hayne said in his interim report. “The culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies,” he wrote.
It’s possible he could urge industry standards for incentives and bonuses, said Eliza Wu, associate professor at the University of Sydney Business School.
While banks have already moved to abolish sales targets for frontline staff and set bonuses more on meeting customer satisfaction targets, Hayne may go further.