The Right Royal Omission
Without doubt the Banking Royal Commission will dominate conversations for a while yet with both pro and against parties having valid arguments. If the law of averages is to be believed, then the report was just about right. So let me dive in and add two unsolicited observation that I believe should have been front and centre of the philosophical debate. The proverbial elephant in the room is glaringly omitted. And that is the relative concentration of banking income and lending across the housing market. The RBA report titled The Australian Financial System in the 2000s: Dodging the Bullet by Kevin Davis shows Australian Banks loan composition to Residential at about 60%, way above other comparable markets with e.g USA at 38% and UK at about 15%. That is almost the highest in the OECD countries and 4 times the UK and about double that of Canada. Naturally, this is concentrated across the Big4. This would imply that banks see mortgages as easy and profitable lending and other segments like industry and small business lending less aattractive. The contra to this is concentration risk (and I guess we are starting to see some of that already) , but possibly the smarter folks have already priced this in. Secondly, the entire causa or reason for the commission was due to “agents or intermediaries” not providing a fair service. A key part of the service provision relates to the average man in the street being overwhelmed with the apparent complexity of financial products that are available. And therein lays the crux of the matter. Why are these financial products overly complex. If we use the normal curve, then the majority of financial products within the 90 percentile could be standardised products and reasonably simple to understand and comprehend. If not, then who are they aimed at ? So why are the providers making what should be a standard product more complex. It’s Simple. Confusion creates opportunities to clip the ticket. Add layers of complexity and you add layers of costs and participants who are all laying into the slice of cake. If one is brutally honest, then many financial products can be digested into an easy to use standardised application, and by extension, many other products too fall within the normal curve. Term Deposits are another example of being a bewildering array of options that are often too confusing for the man in the street to fully appreciate. I am not implying all products can be simpified, but I am guessing that many can. This is not anti-capitalism but merely a way vital financial decisions can be more accessible and easier to understand and also promote a level playing field, untainted by the size of the marketing budget. According to Graham Hand, there were many other areas that were overlooked and its possible that the opportunity to make changes to the Financial sector may not present itself for a long while or when the next Commission is called. He did an excellent summary and raised some vitally important points in his brilliant piece 8 problems the Royal Commission missed. An example he mentions “Take the example of the way banks price their products. Why do the banks rollover the term deposits of existing customers at sub-market rates, forcing loyal customers to make a phone call to achieve a better rate? The vast majority can’t be bothered or don’t know the benefits, and what banks call ‘retail inertia’ makes a major contribution to interest margins.” Its time to declutter the language and limit the marketers sense of obtuse differentiation and keep it simple.
The Australian Financial System in the 2000s: Dodging the Bullet by Kevin Davis, notes that residential loans made up close to 60 per cent of Australian banks’ total loan portfolios in 2009, but less than 40 per cent in the United States and Canada, and 15 per cent in the United Kingdom. The focus on housing lending has, in part, reflected a substantial increase in household sector leverage in Australia over the 1990s and early 2000s to a level consistent with that in most other advanced economies Bank lendingAustralia59.1%Canada32.5%South Africa34.9%United Kingdom14.5%United States38% Edit Table