'Hayne pain' royal commission findings largely priced in
The financial services sector is bracing for Kenneth Hayne QC's interim report today, but it's unclear whether the real blows will land now, or when the final document lands in February.
The financial services sector is bracing for Kenneth Hayne QC's interim report today, but it's unclear whether the real blows will land now, or when the final document lands in February.
The banking royal commissioner is expected to recommend, either in his interim or final report, that major financial institutions be prosecuted for charging customers fees for no service.
Banking analysts expect Hayne will apply a rigorous interpretation of responsible lending standards, which will make it harder to get a home loan and restrict practices that have led to banks lending too much money.
Morningstar's senior banking analyst, David Ellis, expects the interim report to focus on:
- residential lending standards
- vertical integration of wealth businesses
- grandfathered commissions in the wealth industry
- a review of mortgage broker commission.
- He suggests it may also make recommendations around the retail superannuation sector, and the insurance sector.
Ellis says the potential for a "credit squeeze" triggering an economic downturn is the biggest risk for the big four banks.
This could be triggered by the simultaneous softening of borrower demand and implementation of stricter lending criteria.
"However, the banks remain well supported by strong economic fundamentals, as global and domestic economic conditions improve.
"Despite solid fundamentals, the sector is suffering from elevated uncertainty, particularly around pricing risk, credit risk, and operating risk," he says.
Westpac is among those bracing for Hayne's royal commission findings
Ellis notes the banks are investing considerable resources to improve reporting and risk management systems.
"There is a risk the royal commission recommendations could be tougher than expected, and combined with weakening house prices, slowing credit growth, increasing trade tensions, and further economic slowdown in China, bank share prices could face further short-term pressure," he says.
Major bank share prices are all down from 12-month highs, with ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Bank (ASX: WBC) down 9 per cent, 15 per cent, 15 per cent and 18 per cent, respectively.
Hayne will focus on ensuring banks are lending money responsibly when he hands down his interim report.
The Australian Securities and Investments Commission has secured hundreds of millions of dollars in refunds for customers charged fees for advice they did not receive and expects compensation across the industry to top $1 billion.
But ASIC's action was limited to court enforceable undertakings, bans and imposing licence conditions until it launched civil proceedings this month against the National Australia Bank's superannuation trustees.
Barristers assisting the royal commission have recommended AMP (ASX: AMP) face criminal charges for lying to and misleading ASIC over the fees issue. On Wednesday, Josh Frydenberg and Financial Services Minister Stuart Robert released draft legislation doubling jail terms for white-collar crimes and increasing fines five-fold to $1.05 million.
It is not clear if Hayne's interim report will detail findings about individual case studies, including recommendations for prosecutions, or focus solely on policy issues arising from the first four of six rounds of public hearings.
It will cover consumer lending, financial advice, loans to small businesses and issues affecting farmers and indigenous Australians, but not the most recent hearings on superannuation and insurance.
After handing down the interim report, Hayne will shift his focus from past misconduct to what should be done in response to the issues raised.
The $75 million inquiry has received more than 9,300 public submissions, which close today.
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Glenn Freeman is senior editor, Morningstar Australia
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