Final report ‘ignores systemic issues’

The Banking Royal Commission’s recommendations only tinker around the edge of what is a broader crisis, a financial analyst has warned.

Royal Commissioner Kenneth Hayne delivered the final report, containing 76 recommendations, to the Governor-General on Monday afternoon.

Martin North, principal of Digital Finance Analytics, said the report did not deal with the serious structural issues facing the financial services industry, including the separation of financial and lending advice and greater clarity in terms of the role of ASIC and APRA in the industry’s regulatory framework.

“I wouldn’t be surprised if we see another Royal Commission into the financial services industry in another five years, because we haven’t addressed the systemic issues we have. We’re just tinkering around the edge,” North told Australian Broker.

“If you think back to those inquiries, the evidence that was given and the human pain that was visible through those hearings, there were many reasons that was going on, and it was to do with greed, poor structuring and remuneration being aligned to shareholders rather than consumers.”

‘Report won’t open the credit taps’

North said it is unlikely that tighter lending standards, the evidence presented to the Royal Commission and the revised use of HEM are unlikely to change the credit landscape anytime, soon.

 “There’s nothing in the report that is going to open the credit taps,” North said.

“We are in a new normal when it comes to credit availability. Credit is still available for those who can afford it, but we’re not going to go back to a world where credit is available to those who cannot afford it, and that’s a good thing.”

However, North pointed to some major implications as a result of this.

“We’re now looking at a much more serious economic cycle ahead of us in terms of lower home prices, declining credit availability and that has a significantly broader impact on the economy,” he said.

“But that’s not the Royal Commission’s fault – it’s because we’ve had loose lending for too long and we’ve had to now pull it back and get back into shape.”

‘Down forces’ loom on broader economy

North cautioned that there are still many people across Australia with loans they should have never been approved for.

“Loan affordability is in a very bad state, and more than a million people are in mortgage stress. Those are down forces on the broader economy,” he said.

“Bear in mind that there is $6bn dollars in remediation costs that the banks are going to have to find. That will put pressure on the profitability of the banks.”

North said banks’ margins are still under pressure and won’t be able to rely on the kind of revenues they were creating previously.

“This is because the new cultural norm means they now have to work within the system rather than around it,” he said.

“The economic implications of this will be that shareholders will get lower dividends and all of that is negative in terms of economic outcome.

‘Parallels with Global Financial Crisis’

North predicts a 20-30% fixed-trough fall in Sydney and Melbourne housing prices over the next 2-3 years, and a 40% crash if an economic crisis befalls the global economy.

“My parallel is that the Australian economy is where the US economy was at in 2006, which was about a year or so out from the Global Financial Crisis.”

North believes the report should have dealt more seriously with the RBA and the Council of Financial Regulators.

“Five years ago, when the mining boom was on its way out, the RBA’s strategy was to use the housing sector as the next proxy growth engine,” North said.

“They dropped interest rates and were happy for household debt rise nearly 200%, but this is now unsustainable. We have high debt and the banks responded by inflating their books and home prices – so we have high debt, low interest rates and an economy that’s still looking like it’s about to slow.”

North said the Council of Financial Regulators were too slow to deal with lending that was significantly above where it should have been.

“They tried to react to it, but it was too little too late. We’ve now got tighter lending but a massive overhang of debt in the system, and it’s going to take a generation to recover from it.”