Banks remain privileged institutions

Neither their recent history of misconduct nor the Royal Commission report changes the fact that the big banks remain protected. Unlike many other major community institutions subject to Royal Commission enquiries recently, like trade unions, churches, and, currently, the aged care industry, they are insulated by their position from the most drastic government remedial action.

That protection is not because their political position as such, strong though it is. Banks have a lot going for them as representatives of the big end of town in conventional terms, including, close connections with government, making large campaign donations to political parties, exercising elite-level lobbying and maintaining influential networks through their board members and the Australian Bankers’ Association; but that is ultimately not enough to protect them. Their power stems instead from the pivotal place they occupy in the economy. This makes them the best example there is of the disproportionate power of business in politics, described as privilege years ago by the American political scientist Charles Lindblom in his influential book, Politics and Markets.

What is good for the big banks is reputedly good for the whole economy. That proposition is hard to disagree with, which is why they were protected by being accorded special status during the Global Financial Crisis and why it was so hard to bring them to account by calling this Royal Commission. It took several years of hard political struggle despite a crescendo of across-the-board criticism before the Royal Commission was eventually called by the Turnbull government against its wishes. The criticism had come across the spectrum from the Greens through to members of the Nationals.

Labor will not stop reminding Prime Minister Scott Morrison, who was then Treasurer, that he voted against holding a Royal Commission 26 times. Even then the Royal Commission was specifically time limited to about a year, compared to the five years for the Institutional Responses to Child Sexual Abuse RC, in a way which helped to restrict the time available to hear from those ‘customer survivors’ damaged by bank mistreatment. There could have been even deeper emotion generated by the revelations of greed, ineptitude and fees for no service.

This is the context in which the Hayne Report was released. Its content means that prior speculation that the banking industry is ‘about to change forever’ was mistaken. There was too much talk of the industry ‘bracing’ itself against the report. Even before it was issued there were warnings from economic commentators that this industry is so important that politics must be put aside in dealing with the report. That is code for go softly.

The ball is now in the hands of the government and the opposition as an election looms. Several themes have emerged. One is the financial hardship that has already followed stricter bank lending to home buyers and small businesses. The reasons for this are debated, but in the context of falling house prices this issue is sensitive because it touches many Australians whose fortunes are invested in their homes. This theme also extends to the share prices of the big banks; any falls caused by proposed government regulation will impact on the superannuation policies held by millions of Australians.

Another theme is the expressed desire by both sides of politics to be tough on the banks and superannuation businesses by implementing all of Hayne’s 76 recommendations. The government has been willing to wield the big stick by being tough on energy companies but does this willingness transfer to the banks? The Treasurer indicated the government’s inclination to implement all the recommendations, but the Prime Minister has urged caution on wider economic grounds. If the government’s response is too timid Morrison will have to defend that caution by arguing that, as the widely regarded better economic manager of the two parties, the government should be trusted to get the balance right on the issue.

But Morrison risks a voter backlash if he misreads community sentiment given his government’s vulnerability to the charge that it never wanted the Royal Commission anyway and also tried to water down best practice guidelines for the financial adviser industry. Bill Shorten will certainly adopt such a line of attack. Labor can afford to be bolder and tougher in terms of both the industry and the regulatory agencies in an attempt to capitalise on voter disquiet. But Shorten and the Shadow Treasurer Chris Bowen still must be clear on how they would proceed in government.

Whatever the immediate electoral consequences prove to be, it must be remembered that the diminished reputation within the Australian community of the banks and financial institutions will take many years to recover. Trust has been trashed.

Where serious cultural deficiencies within organisations are involved, such as a reckless sales and incentives culture as revealed by the Royal Commission, the task of bank executives and board members will be to lead from the front. Yet their appearances before the RC showed that some of them just didn’t get it. Hayne named the National Australia Bank’s two leaders, CEO Andrew Thorburn and Chairman Ken Henry, as prime examples of such apparent recalcitrance.

Customers must be constantly vigilant against company misconduct and not rely on any government to solve their problems with financial institutions. As voters they will have their chance in May.

John Warhurst is an Emeritus Professor of Political Science at the Australian National University.