Hayne says the problem is capitalism. The solution? Let’s all move to fairy-land.
Ok, so I’ve been digesting the Hayne Royal Commission report over-night, trying to make sense of it all.
But there’s something weird at the heart of it all.
I’ll get to that, but first, what are the implications for the property market and property investors? Here they are in a nut shell:
1. No big changes to the industry
This is being billed as a reset of the financial industry, but I don’t see any major changes here. The banks aren’t having to break up their vertically and horizontally integrated business models (e.g, where a bank owns a funds manager that recommends the banks products to its customers), and apart from doing more to comply with the law, the banks aren’t being asked to change their business models in any real way.
2. No changes to the law
Hayne went to lengths to point out that he didn’t see any need to change the existing laws, only to make sure that the laws were being properly and prosecuted.
3. Regulators need to pull up their socks
On that front, the regulators need to do more, and he wants to see them being less shy about prosecuting banks under the law. Remember how ASIC dealt with the Comminsure scandal by asking for a $300,000 community contribution rather than issuing an $8 million fine? Hayne probably has a point.
4. No changes to the credit environment
As Hayne uncovered more and more dirt on the industry, the banks started tightening up their credit standards. The fear I had was that Hayne would push this further and harder, and credit would slow even more. This hasn’t happened. There’s no recommendations here that are going to crimp credit.
That said, there’s nothing here that relaxes credit either. The banks have already started moving away from income and expenditure benchmarks in favour of looking at customers actual income and expenses, and Hayne wants this to continue.
For property prices, I reckon Hayne is neutral, and given the banks’ history of successfully watering down reforms, possibly price-positive in the long run.
5. Mortgage Brokers hung out to dry
Hayne recommends banning trailing commission on mortgage broking, and moving the mortgage broking industry to a fixed fee system. Many mortgage brokers reckon this will kill the industry, and they’re probably right. I think your owner-occupiers and mum and dad investors will probably just go back to walking into whichever bank has the cuddliest mascot, rather than paying a couple of grand upfront. Banks will go harder on these customers and they’ll pay more in the long run (while the customers will pat themselves on the back in the short run – look how much I saved, Honey!)
I can see there is a mis-alignment of incentives with trialling commissions paid by the banks, but killing the industry without putting in place something to help your average punter navigate the complex world of mortgage finance is a recipe for ripping people off.
6. Capitalism is a flawed system
This is where we get to the bit where it’s just a bit weird for me.
Hayne reckons there’s a problem with the banks’ “culture”. Not “culture” in the sense of their rock art and quixotic dance rituals, but culture in the sense that many people in the industry seem to be motivated by money.
“Why did it happen..? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?
“…Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”
Staff were rewarded by reference to profit and sales… what a highly unusual business model that is. What are freakishly strange culture to have.
I mean, you wouldn’t see that in my business. My staff are motivated by my witty company-wide emails and by premium biscuits in the break-room. Money never comes in to it.
But seriously, what are we even talking about here? Yes, capitalism has its flaws. When people are motivated by money, sometimes people with low ethical standards do things that people with higher standards wouldn’t do. There’s nothing new there.
But are we really suggesting we should remove the profit-motive from banking? And if so, why stop at banking. Let’s just make profit illegal altogether. Let’s move to an economy-wide biscuit-based incentive structure.
Let’s all move to fairy land.
But no, I actually think this talk of culture is a squib. It allows us to feel morally righteous, while doing nothing to address the fundamental issue – the disproportionate power that has been allowed to accumulate in the finance sector, and the captured, wet-lettuce approach to regulation.
But no, we’re not tackling that. We’re talking about some fantasy culture, where no one cares about money.
Off the planet.