The term deposit has matured. Initial scepticism over the timing, scope, and overall need for a royal commission into financial services has transformed into deep concern about the culture and practices in one of our most important industries.
None of the major banks have escaped the Commission’s ire.
Perhaps that’s because none of them have had an incentive to behave better. There’s been little financial reward for being the bank to improve.
In his interim report, Royal Commissioner Kenneth Hayne pilloried them for their greed, putting profits before customers. He hinted that submissions he has not yet fully examined may uncover even more misconduct.
Conflicts in providing credit
Are loan providers offering customers what’s best for them, or what’s best for the bank?
A disproportionate share of loan products recommended by mortgage brokers working for firms affiliated with banks are produced by other firms affiliated with those banks.
Mortgage brokers currently help originate more than half of all new loans. They operate under an opaque commission structure with rewards that are unlikely to align with the customer’s best interests.
A change to up-front, transparent commissions should be mandated, and enforced by the Australian Securities and Investments Commission.
The guidelines allow banks to do things such as using rough guides for household expenditure rather than individually examining the circumstances of each borrower.
Some have argued that this is a better practice than making inquiries of borrowers, who are likely to exaggerate their ability to repay loans. But it runs the risk of constituting a dangerous form of financial advice.
If a loan is recommended to a customer, they might infer from that the bank has deemed it as being appropriate for their needs, rather than merely “not unsuitable”.
In several instances detailed to the commission, customers borrowed as much as they have been to allowed by banks, only to later blame the banks for not protecting them from themselves.
Banks also argue that there is a trade-off between obtaining accurate documentation and processing loans quickly.
Inadequate internal processes have led to customers being offered products that they can’t use, such as financial advice for dead people, or insurance that’s impossible to claim against.
These failings have been rightly condemned by the commissioner, even if they might not have affected a significant portion of the banks’ clients.
They say their internal processes have already improved, and bad apples weeded from the staff.
It’s our fault, too
Commissioner Haynes said that one obstacle to greater consumer power is an alarming lack of financial literacy among consumers, which has also been unearthed by the commission.
Banks exploit our loyalty, our inertia, and our inability to negotiate.
They also help exacerbate these things, by offering too many products that are too hard for the average person to compare.
If we educated ourselves, many of the problems identified by the Royal Commission would disappear.
Making public the actual interest rates paid on our loans, the fees paid to advisers and brokers, and consumer credit scores would help as well.
But it will only help us if we are willing to help ourselves.
The community rightly expects a lot from banks, but a second thread running through the Royal Commission’s interim report is that but we need to expect more from ourselves as well.
- ^ political mistake (junkee.com)
- ^ Banking Royal Commission's damning report: 'Things are so bad that new laws might not help' (theconversation.com)
- ^ second-highest returns on equity in the world (www.rba.gov.au)
- ^ pilloried them (theconversation.com)
- ^ Vital Signs: for all its worth, the banking royal commission could hurt a generation of battlers (theconversation.com)
- ^ ASIC guidelines (download.asic.gov.au)
- ^ Some have argued (www.afr.com)
- ^ How 'liar loans' undermine sound lending practices (theconversation.com)
- ^ pre-empt its findings (www.afr.com)
- ^ Financial literacy is a public policy problem (theconversation.com)
Authors: Andrew Grant, Senior Lecturer, University of Sydney