Bastard Banks!

7th of February, 2019

It’s the day a nation stops. All 325M of them.

Super Bowl 53 where the New England Patriots beat the LA Rams and 41-year-old Tom Brady becomes the only player to have now won six!

But many thought it wasn’t the spectacle it should have been, a dull unexciting game. One fan Kevin Clark wrote: “The plan: Play such boring football in the first half that people will find Maroon 5 exciting.”

Well many still didn’t find Maroon 5 entertaining. Just another Meatloaf like performance I guess…

But on the same day, the other side of the world, Australia’s Royal Commission into Banking was released!

It’s an interesting doc, maybe not quite worth a bedtime read, but Kenneth M Hayne and his cohorts did make a total of 76 recommendations that the Liberal Party has been quick to align themselves with. In fact the language was “We are taking action on all 76 recommendations” They just failed to state what action they would take…

The clock is ticking until the next election so the likelihood of any of Kenneth’s ideas being written into legislation is extremely remote.

But the battle lines have been drawn. Consumers, regulators, bankers, brokers and politicians….

So, it will be interesting to see just what action is taken. What words are promised and which lobby groups are the loudest.

From Labour’s perspective they are in strife re Haynes proposal for workers to have a single default fund over their working lives, because a “Stapled” fund is highly likely to be at odds with the Industry (read Union) based super funds.

As for the Liberals, well the activists for the Mortgage Broking Industry and the brokers themselves will not let their precious commissions be easily confiscated from them.

When you think about it, these 76 recommendations are really just an attack on those in a privileged position due to previously issued Government Granted License. Now that the Government wants to alter the terms of their privilege there will be plenty of fights, posturing and I’m sure “some grease” before we hear the end of it.

The real questions of winners and losers will be who gets to retain their government granted license? Whose license is downgraded or restricted and whose becomes completely irrelevant and worthless?

Do remember that many political lives are under pressure here.

Since Bill Shorten started banging on about the need for a Royal Commission we have seen everyone’s mate ScoMo, take several different positions.

Initially his stance was “Bill Shorten’s call for a Royal Commission is a call for a populist whinge”.

That then changed to “The issues of the Royal Commission were not things that the government was not aware of”

Which moved to “the evidence is deeply disturbing” when the hearings were underway.

I’m not trying to pick on SocMo, or poke fun at his flip-flop approach but just make the point that political positions have been known to sometimes change.

For now, Bill Shorten doesn’t like negative gearing?

But just like much of the legislation that was passed in the US in response to the GFC has been watered down or repealed altogether, I think that the cycle will continue to turn, and then – things just happen to change.

Credit is tight.

Sydney property prices have been falling.

The Banks shenanigans have been exposed.

This public, quite rightly, is upset and wants an elevation in standards.

However, should the banks successfully navigate the mid-cycle slowdown then this could be the perfect platform for them to show how much they have learned and improved on their behaviours. If this is so then what do you think their reward will be?

I read the following quote which sums up how many people view this issue and the creation of the unscrupulous banking culture that has been recently exposed.

“The genesis goes back to the 1980s and 1990s when Australia shifted from a world where banks were tightly controlled and credit was rationed, to a world where credit was free and easy, and banks — embracing an aggressive sales culture — flogged products to make money. Alongside the floating of the dollar and the dismantling of tariff walls, the deregulation of banking was one more step in the liberalisation of the economy during that era.” (Stephen Long)

I’m not disagreeing with anyone who looks on with disdain as to the culture displayed by our banks. Some of the stories were truly disgusting and revealed a complete disconnect between reality and the standard with which society expects such institutions to behave.

The Haynes Report called for among other things, to enshrine the obligations of banks to work in the best interest of their clients – something that in my opinion should not need legislative protection but surely common and moral decency of banks demands this.

Maybe not.

What I found interesting with my first look though the findings is that most of the really big recommendations that will make wholesale changes to the way the financial industry operates are aimed at what I would call Auxiliary Financial Services and not the Bastard Banks.

Mortgage Brokers copped a bashing. As well as taking their commissions, they will only be able to charge the customer for services and have to provide a Statement of Advice. But they were not the only ones. Funeral Bonds should be treated like financial products, and Car Dealerships will no longer be able to boost their bottom lines with those expensive “Flex Commission” loans.

The axe has fallen for anyone selling financial products at the point of sale!

How this affects the banks and their lending officers is not so clear, as it seems much of the competition for the banks will be removed and we will be moving back, for the time being, to a situation where if you want to get a loan, you will need to visit your local bank manager back in one of those branches they closed all those years ago….

I’m not sure how this dovetails with the government policy of embracing new fintechs to create a new competitive and open banking regime but I guess they will find some spin to tie them together or maybe just ignore one altogether.

But somehow, despite all the anger and all the criticism of the banks, they will be the ones that emerge from this stronger and more profitable.

Some might wonder why after all this upheaval that we can we be so confident about the future.

The way in which we see the world one thing is perfectly clear -the cycle MUST perpetuate!

We continually say that each cycle is “Same Same, but Different”. In this cycle clearly the Royal Commission is something that we haven’t seen before. So it will affect the manifestation of the cycle.

So, despite all the emotive language, I have to say I agree with UBS banking analyst Jonathan Mott when he said

“It is possible that the banks may face criminal proceedings, but we do not believe that any of the 76 recommendations by themselves will have a material financial impact on the banks.”

Something that was completely omitted from the report was the suggestion that there would be any restriction to the manner in which the banks create credit. The report will impact the manner in which credit products will be marketed or sold and how much those selling such financial products will be renumerated, but the banks will continue to be able to create credit.

There has been NO change to their credit creation models

I’ll say it again, because none of the underlying drivers have changed- the cycle will continue.

With the winner – The Banks!