The recent release of Kenneth Hayne’s final report from the Financial Services Royal Commission was predictably explosive.
With a total of 76 recommendations – and early signs that just about every one of those will be heeded – the future landscape of this massive industry looks set to change significantly.
To this end, a natural question arises – if the banks are going to be pulled into line properly by new regulation, can we (once again) put our faith in them to conduct themselves to the standard that we, the community, expect? The economic history of industries tells us that banks, like all business firms, tend to operate according to their “social licence”.
That is, their actions are largely conditioned by the level of trust they have built up, and “what they can get away with”.
The revelations of the Royal Commission severely depleted the level of the banks’ collective social licence, which is currently at a historical low.
Even long-time political allies of the banks are now verbally bashing their former bedfellows.
However, presuming no further bad publicity in the next few years, that social licence will gradually return, and so will our trust in banks.
The question is, should we allow it to? And how can we make sure this doesn’t happen again? In the past, many of us have been guilty of being lazy, allowing these institutions to ride roughshod over us.
Not only do we end up with a sub-optimal deal individually, but cases of misconduct (such as those during the hearings) also begin to mount.
Ultimately, there is some level of mutual obligation. If we exert our power as consumers far more vigorously (and more often), then banks would be unable to accumulate sufficient social licence – in the first instance – to be taking us all for a ride. As a call to arms, we consumers could do better for ourselves by actively approaching our financial institutions, asking for a better deal, and regularly threatening to walk to their competitors if they do not oblige.
That we do this is more important in countries where the level of natural competition in the sector is low, as we are faced with in Australia.
The ironic lesson is that the more trust we place in them, the less trustworthy they will become.
As active and engaged consumers, we have the power to prevent any future relapse, and should exercise it.
Dr Liam Lenten is a senior lecturer in microeconomics at La Trobe University.
