Australia’s battered banks
What will the scandal mean for NZ?
Any day now, Australia’s Royal Commission into misconduct in the financial services sector is due to release its initial findings. After all the evidence of misconduct the inquiry has heard, it’s unlikely the industry is eagerly awaiting its report.
Given that New Zealand’s big banks are all Australian-owned, the inquiry’s findings could have implications for this country. Once the report comes out, New Zealand regulators have just a month to process it before releasing their own report into New Zealand’s banks.
Australia’s four big banks — Commonwealth Bank of Australia, ANZ, Westpac and National Australia Bank — as well as other lenders, insurers and financial advisers, have been in the spotlight since March, when the first in a series of hearings kicked off.
There have been revelations of irresponsible lending, sales of inappropriate products, fees charged for advice not given and even fees being charged to dead people. There has also been evidence of information being concealed from the regulators and failures to rectify problems which have dragged on for years.
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Curtayne, a Sydney-based portfolio manager with New Zealand fund manager Milford Asset Management, expects the initial report to be “fairly scathing”.
He believes it will focus on the banks’ poor lending practices, and mortgage lending in par- ticular, and the lack of due diligence by the banks when assessing loan applications.
Curtayne says that lack of due diligence has resulted in lending being approved that shouldn’t have been — and in some cases people losing their homes.
By highlighting the issue, the inquiry has already resulted in a change by the banks, which are now said to be making a much more thorough assessment of loan applicants’ personal expenses.
Lending growth in Australia has slowed as a result and Curtayne says the banks have lost market share to non-banks.
Property prices in Sydney and Melbourne have dropped in recent months and Auckland’s property market has flattened out after years of double-digit growth.
Mortgage brokers in New Zealand report that banks here are also asking for more information on people’s expenses, although just one bank — Westpac — says it has made changes to its methodology.
Andrew Bascand, managing director at fund manager Harbour Asset Management, who closely follows the Australian banks, says: “What we don’t want is no lending in New Zealand and Australia. But we also don’t want irresponsible lending.”
He says the general impression from the New Zealand regulators — the Financial Markets Authority and the Reserve Bank — is that there have been no systemic behavioural issues.
But there may still be individual cases to be put right.
“I do think we will continue to see changes in the banking structure in Australia and that will filter down to New Zealand,” says Bascand.
But he says it is not just the Australian-owned banks that should heed the inquiry’s message, but New Zealand-owned banks too. “Kiwibank, TSB, Heartland — there are lessons here for those institutions as well.”
Bascand says the Australian banks have already tried to interpret what might come out of the inquiry.
Commonwealth Bank of Australia, which owns New Zealand’s ASB bank, has decided to spin off its asset management and mortgage broking businesses into a separate operation in a bid to reduce perceived conflicts of interest.
Meanwhile, the ANZ sold its advice business to financial services company IOOF. “From the bank perspective we have seen a lot of changes already.
“I do think recommendations will be made in terms of ensuring directors, executives and senior managers will be significantly more accountable for the advice part of the business.”
Bascand says one of the most shocking things to come out of the inquiry has been the lack of transparency between the financial firms and
What we don’t want is no lending in New Zealand and Australia. But we also don’t want irresponsible lending
Andrew Bascand, Harbour Asset Management
the Australian regulator, the ASIC.
Some companies were found to have concealed breaches of the rules, or reported some breaches, only to later reveal that there were many more.
Others reported breaches but then took years to fix them.
Even before the report, it has been an expensive exercise for the banks. Some estimates have put the cost of the hearings alone at A$1 billion for all the parties involved.
And beyond those costs, Bascand says the fines levied have been large and the remediation costs high, as well as the cost of bringing in new regulatory controls.
The deadline for the initial report is Sunday, September 30. After it is released, the chief executives of the major financial firms will have a chance to respond before a final report comes out in February.
Curtayne says it is also important to remember that while the Australian Royal Commission can make recommendations, it can’t change the law or regulations — that would be up to the government and regulators.
In New Zealand, the FMA and RBNZ are expected to release a report on the NZ banking sector by the end of next month and the life insurance industry by the end of this year.