The royal commission we had to have

Have you ever wondered what goes on behind the closed doors at Australia’s big banks? The Federal Government will be opening the vault on banking practices across the country as part of a Royal Commission into the sector announced by Prime Minister Malcolm Turnbull last month.

Public pressure on the industry has been mounting since the multi-million-dollar financial planning scandal at the Commonwealth Bank was revealed in 2014.

A Senate report at the time found the bank’s customers had lost hundreds of millions of dollars after financial planners put money into high-risk investments without getting a green light from the clients.

Three years down the track the Prime Minister has finally given a Royal Commission the go-ahead, with the big banks (ANZ, Commonwealth, NAB and Westpac) now even admitting that an investigation is necessary to help restore faith in the embattled sector.

So what does it all mean?

The Royal Commission’s main task will be to investigate misconduct in the financial services industry, including the actions of company directors, officers or employees, or anyone else acting on a company’s behalf.

Aside from banks, both large and small, those being put under the microscope will include insurers, financial services providers and superannuation funds (apart from self-managed superannuation funds).

The Royal Commission will look to uncover actions that “fall below community standards and expectations” and identify whether they relate to the particular culture and governance practices of a financial services entity, or broader cultural or governance practices within the industry.

Basically they’ll be looking to reveal (and consequently stamp out) underhanded or dodgy dealings being carried out by banking, superannuation and financial services providers.

The Royal Commission will also seek to uncover instances where a financial services entity has misused the retirement savings of its superannuation members, such as in the Commonwealth Bank controversy, and consider how well equipped regulators are to identify and address misconduct.

So how will this affect the average consumer?

For one thing it’s going to cost a lot on both sides, with the government putting aside $75 million of taxpayer funds for the process.

Analysts are also predicting the major banks will shell out up to $100 million each in legal costs to put their cases forward to the Royal Commission.

While this could eat into the banks’ bottom lines and potentially have an effect on their share prices or dividends, there’s no way of knowing at this point to what degree this would trickle down to shareholders.

From a political perspective, the Royal Commission will prepare an interim report for the government by September next year, with a final report due within 12 months.

That report will contain the detail of the Commission’s investigation into the sector, as well as recommendations on any changes needed within the industry’s legal framework, practices or regulators to minimise the risk of future “misconduct”.

It’s hard to predict what the outcome of the Royal Commission will be, or how it could affect the average Australian.

What we do know is that the financial services sector is dominated by the major banks whose major concerns, as publicly listed companies, are profits and returns to shareholders.

If the Royal Commission leads to an improvement in financial oversight, which better protects the best interests of other stakeholders, such as customers and the broader community, then it will have been a worthwhile exercise.