The Royal Banking Commission Australia: An Insight

Over the last ten years, Australia’s banking and financial industry has been plagued with scandals. Investigations and reports by journalists and regulatory bodies into misconduct within the industry have uncovered far-from squeaky clean behaviour.

Nathan Daly
May 21, 2020

The Royal Banking Commission Australia: An Insight

Over the last ten years, Australia’s banking and financial industry has been plagued with scandals. Investigations and reports by journalists and regulatory bodies into misconduct within the industry have uncovered far-from squeaky clean behaviour. As a result, the Royal Banking Commission (RBC)was launched on 14 December 2017.

The core issue was an aggressive sales-driven banking culture that promoted profit-at-all-cost behaviour and ultimately left the customers’ best interests behind. As the RBC inquiries unfolded, allegations were made, and banks were charged penalties —― leaving the financial sector under great scrutiny.

The Royal Banking Commission triggered an overhaul of the entire financial sector, and this has led to strict enforcement and the tightening of Australian banking practices and regulations. Though necessary to protect consumers, this has created waves among the industry and resulted in a difficult lending environment. In this article, we look at what the Royal Banking Commission is all about and how it affects commercial mortgage lending.    

What is the Royal Banking Commission Australia?

A royal commission is a serious public inquiry into specific matters of public significance. In the Australian government system, it is the highest form of inquiry, and a means to investigate malpractice in particular areas such as government structure, child protection, and financial services. Royal commissions are typically held by a judge or person in a comparable legal position who has the power to gather evidence, call witnesses and offer those who cooperate protection.

There have been 135 royal commissions held in Australia since the Parliament introduced them in 1902. One of the most recent was the “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.” This commission was established to look into alleged misconduct within the industry. The RBC was triggered after an investigation by Fairfax and Four Corners journalists into the sales-driven culture among the Commonwealth Bank financial planning sector, and it further implicated the Westpac, NAB, and ANZ financial institutions.

The Build-Up

On 5 May 2014, Four Corners aired the “Banking Bad’’ episode — an investigation into the Commonwealth Bank’s financial planning sector. Four Corners described it as “profit at all cost - a culture that has been built on commissions.” The investigation revealed extensive misconduct by the Commonwealth Bank financial planners, who misled customers into risky investments that lost some customers hundreds of millions of dollars.

Other misconduct uncovered during the investigation included forging of customers’ signatures to complete profitable product switches and overcharging of fees. The inquiry found 31,500 of Commonwealth Bank’s customers were charged for advice they did not receive. The findings provoked the Senate inquiry in 2014, where the RBC was first recommended. Westpac, ANZ, and NAB were all subsequently found to be involved in the financial planning scandal too. Since the initial investigation, further inquiries and reports were made into the unlawful behaviours of the big banks within the industry, and the following was uncovered:

●      An ASIC report found that big banks and financial institutions, including the Big 4 and AMP, charged their customers financial advice fees without providing advice.

●      Allegations that CBA breached anti-money-laundering and terrorism-financing laws on almost 54,000 separate occasions were made.

●      Comminsure were reported to be using unethical tactics, such as out of date medical interpretations, to decline or delay insurance claims and payments.

●      ANZ and NAB were penalised for rigging the overnight bill swap rates, one of the economy’s most crucial interest rates, as the benchmark for personal and commercial lending.

Whom does it Affect?

After seven rounds of public hearings, high court and royal commissioner Kenneth Hayne submitted his final report on 1 February 2019. The report contains 76 recommendations that will affect almost every Australian and trigger an entire overhaul of the Australian financial services sector. The report’s findings challenge crucial areas of banking, including financial advice, rural lending, and superannuation. Some key points from Hayne’s recommendations included:

●     Mortgage brokers are to act in the best interests of borrowers.

●     The removal of conflicts of interest between consumers and brokers by banning trial commissions and other unacceptable kinds of lender-paid commissions on new loans from 1 July 2020.

●     One default only account for superannuation members.

●     Protection of vulnerable customers by refining and solidifying anti-hawking requirements for products such as superannuation and insurance.

●     The definition of small business to be expanded in the Banking Code so that the code applies to any company or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million.

●     A comprehensive national scheme for farm debt mediation to be established.

●     The removal of default interest on loans in places impacted by natural disasters.

The Effects of the RBC on Commercial Mortgage Lending

As you can see, the impacts of the RBC will ripple across the entire banking and financial sector. Though there are no major changes to existing commercial and business lending regulations or any new ones to be set, it is important to note how the findings and recommendations that Commissioner Hayne released will cascade down to commercial mortgage lending.

●       A significant consequence of the RBC is the difficult hurdles banks will face to have loans approved. Strict lending criteria will continue, and businesses will find it even harder to access funding.

●      Australia’s cooling property market combined with these strict lending conditions, will affect business owners who are reliant on using their own home as security to meet bank lending criteria.

●      Banks will not favour businesses without a robust asset profile to offer as collateral.

Alternative Commercial Lending Solutions

As the RBC findings continue to tighten lending requirements, we will see the big banks shy away from high risk and unsecured lending. This means business owners will be forced to seek alternative finance options with lenders who are not restricted to the same criteria as traditional banks. So what are these options?

Fintech, P2P, and non-bank mortgage lending can provide lending options when traditional banks are unable to meet businesses lending needs due to the climate created by the RBC.

Fintech

Fintech describes any technology used in financial services. Fintech companies utilise modern technology as their essential business function. Some Fintechs maybe banks, and in these circumstances, they must adhere to banking regulations.

Non-Bank

A non-bank doesn’t have a full banking license and are not governed by APRA. Non-bank lending options are a better option than conventional banks for borrowers with low credit profiles or adverse history.

P2P

P2P lending uses a model of financing that utilises individuals, private companies, distressed debt trading funds, high net worth individuals as lenders who become creditors on loans. P2P lenders take on higher risk investments.

If you are facing challenges with traditional commercial lending and would like to discuss your options with a customer-focused broker, Acumen Finance is a highly experienced aggregator implementing P2P, non-bank, and fintech options. Using our advanced platform, we find you the best lending match, ensuring an efficient and accommodating lending solution to meet your commercial mortgage lending needs.