17/01/2018 by Mike Phipps – Phippsin Pty Ltd

Here’s a scenario. Imagine that you have accidentally killed someone or maybe you have committed a major white-collar crime such as embezzlement. Now, imagine that you’ve gotten away with it. Years have passed and you’re in the clear. Trouble is, you are overwhelmed with guilt. Maybe you’ve had a change of heart, or just genuinely become a better person, and you wish to set things right.

What should you do?
Turning yourself in might give a sense of relief, closure and justice to those affected by your crime, but it will also cost the state a whole lot of money to investigate your crimes and potentially apply and manage a punishment. If you are truly reformed society may suffer overall from the loss of your expertise in your field of work.

Since you are remorseful and truly have changed your heart, punishing you by imprisonment will serve no further end than retributive justice, but maybe the people affected by your crime deserve this?
What is the best course of action here? Which would benefit society overall?

An interesting moral and ethical dilemma to be sure and, as luck would have it, one that we can now watch play out within corporate Australia because an extraordinary thing happened this week. It is reported that the trigger for the Turnbull  government’s decision to launch a banking and financial services royal commission was a letter authored by our four major banks. According to reliable press reports (is there any such thing these days?) the announcement came after the CEOs of the big four banks wrote to Treasurer Scott Morrison asking for leadership on the issue. Setting aside the desperation that is evident in a request to Mr Morrison for leadership this all seems completely farcical and very convenient for the government.  Under enormous pressure to have an enquiry and wedged by previous statements declaring no interest in a royal commission the Prime Minister has the perfect circuit breaker. Some of our largest companies run by some of our highest paid managers have asked for an enquiry to help them better run their businesses and create a stronger level of trust with their customers.  That is, a tax payer funded business planning, risk management, customer relations and strategy process to potentially make our banks better corporate citizens.

Before we go any further let’s get a few things straight.  When I reference banks, I am talking about the major institutions, the regulators who watch over them and the executives who make the key decisions. I am not talking about the poorly resourced and brow beaten front line staff who are forced to try and deliver the latest transitional, revolutionary, cutting edge brain wave strategy of the most recently appointed general manager.  I feel for bank staff these days. It’s their job to explain the apparently irrational manner in which banks make policy and in many cases explain why yesterdays great lending opportunity is todays declined loan. Having said that I think we are seeing a dumbing down of front line process and expertise brought about mainly by the banks desire to take away staff authority while streamlining and automating lending and product / service delivery.  So many systems, so little efficiency.

Of course the past year has seen the banking sector do themselves no favours in the PR stakes with everything from overcharging to rate fixing popping up on the radar. To no great surprise the popularist politicians smelt blood and the great unwashed, having zero understanding of how banks work, are on the warpath. The media are having a field day and sadly, our banks only have themselves to blame. Just watch one of their chief executives on TV being interviewed.  They continually lapse into bank speak, never directly address a question and never ever admit blame.  Hmmm, maybe they would make great politicians?

As an ex banker (thank god!) and having a business that deals daily with most of the banks in this country it seems miraculous to us that these institutions function at all.  Some of the processes and decision-making outcomes beggar belief.  It is not unusual for bankers we deal with to comment privately that decisions cannot be explained except to say that it’s bank policy.  Of course, some of the blame for this state of affairs lies squarely with the regulators.  Loan application, approval and documentation compliance has now reached a point where I will bet my house that no one reads all the paperwork, far less understands it.  Sadly, we must read everything and then make sense of it for clients.  I suppose I should be happy, we will have jobs forever at this rate.

So, in the context of the broader corporate landscape and with a pending banking royal commission particularly in mind where are we and what’s the 2018 path looking like.

Firstly, let’s get a few obvious things out of the way.  Yes, interest only finance will get harder, first timers will find it harder to get maximum gearing, and finance periods in contracts will continue to need long run in times and extension after extension!  Banks will become like the rabbit in the headlights, trying to keep up appearances with business lending while all the time being terrified of the regulator’s pressure on credit quality standards and what might fall out of the enquiry.

Ok, now we’ve got that out of the way what else.  I suspect a royal commission will, in the first instance, cause the major banks to become even more inwardly focused than they are now and that’s saying something. The distraction of an inquisition must surely have an impact in an industry where reliability and service are not exactly gold standard. The commission will no doubt reach its findings, table a report and we will be left with a huge bill and not much will change. My fear is that in the misguided desire to protect the consumer we will end up with even more regulation and paper, the cost of delivering banking services will rise and service and reliability will suffer even further.  However, I am not just a whinger with no answers.  Here’s the wish list:

  • Compel banks to deliver on finance quotes. If you quote the deal and nothing changes approve the deal per the quote.  If the client spends a fortune on legal due diligence, bank fees and accounting only to have the deal declined when nothing material has changed since the application was lodged the bank should pay the costs. Might lead to a new trend in really thinking about the deal before recklessly providing a quote with no credit department backing.
  • Compel banks to meet pre-agreed time frames for service and product delivery. Sorry, the credit manager is away and the credit queue is a mile long so you have lost your purchase isn’t good enough. Again, provided the application and supporting documents are lodged by a pre-agreed date the bank must hit the finance date.  Miss it and the bank cleans up the mess.
  • Create a culture in the banking sector where clients are treated like real humans. Finance plays a huge part in peoples lives and I am horrified by the fact that some banks seem to think that a loan application or a financial service is just a product like any other.  It isn’t!  Banking and finance services and products play a significant and intrinsic role in the way we live.  Let’s try and get to a point where the owners of these products and services actually value the relationship.
  • Cut the regulation and paperwork. This one is hard and requires borrowers to take personal responsibility. The level of rules and paper is as it is because our various governments can’t trust us to make intelligent decisions.  As a result of some of us not wanting to take responsibility we now have compliance and legislative frameworks designed to treat us like children. Why not allow the consumer to decide via an opt in/opt out system.  I don’t need all that disclosure paperwork, I understand what I am doing and I won’t sue the bank if my decision turns out to be a dumb one. In the long term this also requires investment in financial education so we stop turning out students with no clue about our financial system, debt, budgeting, tax or money in general.

Of course, none of these matters will be addressed by any commission. They would all be considered too petty for such an important and politically charged process.  That’s a shame.

I’ll leave you with this from my favourite source of wonderful quotes. Have a great 2018.

“If you destroy a free market you create a black market.”

—House of Commons, 3 February 1949

Churchill added: “If you make ten thousand regulations you destroy all respect for the law.”

He was arguing against the stifling regulations of industry and commerce by the postwar Labour Government (1945-51). Not a lot new under the sun.

Also, my thanks to The Escapist Forum for the inspiration in my opening paragraph.

Mike Phipps F Fin
Director | Phippsn Pty Ltd
ACN 139 124 673