It hasn’t even started yet – you’ll have to wait until Monday for that – but the royal commission into banks could turn out to be a dud.
The commission says it will offer no legal protection to alleged victims of misconduct by the industry who have already signed confidentiality agreements that prevent them speaking publicly about their experiences.
Not a good start, because without such testimony it’s hard to see where the commission’s impact will come from. The banks said on Thursday that they would not enforce the confidentiality clauses, but it still leaves the question of how many will be willing to come forward.
As a macroeconomic researcher who has spent the last few years investigating the dark side of Australia’s $1.7tn mortgage market, I can tell you it’s not a pretty sight. While illegal misconduct by mortgage lenders appears systemic, what is even more concerning is that our financial regulators, such as the Australian Prudential Regulation Authority (Apra) and Australian Securities and Investment Commission (Asic) who are supposed to protect society from financial misconduct, appear to be caught up in what is described as “regulatory capture”.
This is the situation that occurs when a government’s regulatory agency ends up advancing the political or commercial concerns of the very people, companies or entities it is supposed to be regulating.
For example, my research has unearthed several hundred instances whereby a mortgage borrower had discovered once they were in default that their financial circumstances had been modified by their lenders in order for computerised loan approval algorithms to approve the loan in the first place. These are loans that should never have been granted. More often than not unfortunately, these types of allegations arise en masse only when we see a negative change to the economic conditions of a particular town or region’s housing market.
This should have set alarm bells ringing with Asic (on a case-by-case basis) and Apra (at a systemic scale). However, when these alleged victims contacted Asic or Apra to make these types of serious allegations, the regulators refused to investigate the matter, leaving the borrower at the mercy of the financial ombudsmen who (based on my experience in helping out the odd alleged victim for research purposes) pressures borrowers into signing unfavourable and unreasonable settlements with their lenders despite clear acts of misconduct by the lender. That is regulatory capture.
Fortunately, a few victims were helped by financial consumer activists, or the media who aided them into receiving favourable settlements with their lenders to reflect the damage caused. Often though they had to sign a document forbidding public disclosure of the settled matter. Even those alleged victims who settled under very unfavourable terms relative to the alleged financial crime committed against them had also been forced to sign agreements inclusive of similar confidentiality.
But as the royal commission offers these borrowers no legal protection should they speak up, it is highly unlikely that any of them will do so.
If alleged victims of financial misconduct are not able to speak up, and our financial regulators had previously refused these individuals protection and justice under the laws they regulate, why are we even having a royal commission into the financial services sector in the first place? In my opinion, and based on the circumstances that lay in front of us, Apra and Asic should hold just as much accountability (if not more when the financial system fails its consumers) as the banks and lenders and insurance companies they regulate that acted with misconduct in the first place.
The unfortunate reality of regulatory capture, particularly when it comes to financial services and mortgages, is that current and future consumers of financial products are completely unaware whether a lender has a good or not-so-good track record of acting within the rules.
Ultimately, Asic and Apra would prefer society to believe that it is the mortgage broker industry that has created all these problems. However, it’s a little hard to allege mortgage broker misconduct when an alleged victim didn’t even use the broker channel to acquire financing. But this mantra fits in nicely with the lenders Asic and Apra regulate. While there are more than likely a few bad-apple mortgage brokers out there, they are not the industry participants that approve or decline a mortgage or lend money; but likely the industry participants this royal commission will attempt to throw under a bus.
