Commission won’t ‘erode’ competitive advantage of majors

In a research note released late last week, Morningstar analyst David Ellis considered the potential impact that a Royal Commission will have on Australia’s four largest lenders.

“Despite the surprise in the government’s policy backflip, we like the way the four major banks surprisingly preempted and headed off the potential for a dangerous and far-ranging inquiry,” Mr Ellis said.

“The Royal Commission will go some way to ending the political attacks on the crucial banking sector, a sector underpinning Australia’s economy,” the analyst added.

On Thursday, 30 November, the four major banks penned a letter to Treasurer Scott Morrison asking him to establish a “properly constituted inquiry” into the financial services sector.

In the letter, the chairmen and chief executives of NAB, CBA, Westpac and ANZ asked for the establishment of an inquiry into the financial services sector.

Within hours of the letter being made public, Prime Minister Malcolm Turnbull announced that the government will launch a Royal Commission into the banks.

Morningstar is not expecting any “major surprises” in the final report, but noted that there is “always the risk of unintended consequences”.

“The major banks successfully initiated the government policy backflip, wisely shutting down the potential for an out-of-control parliamentary inquiry into the four major banks,” Mr Ellis said.

“We don’t see the Commission eroding the strong competitive advantages of the four major banks.”

Morningstar believes that the Royal Commission is necessary in order to “clear the political air” and enable all Australian banks to focus on dealing with challenges of technology-driven disruption and economic uncertainty. However, Mr Ellis argues that the Commission will be a “significant distraction for bank boards and senior management”.

The Commission’s terms of reference was released last week following Mr Turnbull’s announcement. According to the document, the Commission must inquire into several areas, including:

• The nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf).
• Any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations.
• Whether any findings of misconduct are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the industry or relevant subsector, and are the result from other practices, including risk management, recruitment and remuneration practices.
• The effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by a financial service entity.
• The adequacy of existing laws and policies relating to the provision of financial services.

[Related: Banking Royal Commission could force S&P revision]