Clean up banks or cop another crisis

The global financial crisis hit Australia 10 years ago but it is crucial to remember it in thinking about the bad behaviour in the financial services sector that former High Court judge Kenneth Hayne has covered in his interim report.

Hayne’s royal commission has exposed the industry’s greed and lack of concern for its clients’ best interests. Clearly the culture at the top of financial services companies is unhealthy. Bankers are paid based on how much business they write. That gives them an incentive to lend more than their clients can afford or sell products not because they make sense but because they pay the most in kickbacks. Hayne seems to suggest that the answer is not more detailed laws but a clearer, simpler definition of banks’ duty to clients.

The other part of the answer lies in tougher enforcement of existing laws. The Australian Securities and Investments Commission (ASIC), the primary regulator, was too close to the companies it policed and too scared of them. The penalties were chicken feed compared with the tens of billions of dollars in profit every year. Changing the regulator’s culture will require new people at the top, more powers, strong, bipartisan political support and money. ASIC’s budget was cut in the last federal budget. This cut must be reversed dramatically if we are to avoid the cost of cleaning up the mess of another financial crisis.