The Royal Commission into banking kicked off in December 2017 and its long awaited report was published at the beginning of February. The Commission was originally set up in order to investigate allegations of misconduct by financial institutions. On that score, its final report didn’t disappoint: several (unnamed) institutions and individuals may face criminal charges for misconduct in its aftermath. There is no doubting that the opening of the Commission has had a real impact on conditions in the housing market. Lenders scrambled to clean up their act following its commencement and clamped down hard on credit policies. In Victoria, this has meant that the number of housing loans to owner occupiers over the three months to November 2018 was 7.7 per cent lower than 12 months earlier with investor lending in Victoria down by 18.6 per cent over the same period. Predictably, new home building activity (especially apartments) is moving considerably lower and Melbourne house prices have started to fall more quickly.

In total, the Royal Commission made 76 recommendations spanning areas like banking, insurance, superannuation, financial advisers, governance and regulation. If acted upon, the mortgage broker industry will be severely curtailed while the eligibility criteria for small business loans will be relaxed. Tighter restrictions are to be placed on financial advisers and banks will be pressured to place greater emphasis on good conduct and governance in terms of how staff and management are rewarded. The report recommends that APRA and ASIC should continue to jointly regulate Australia’s financial system (the so-called ‘twin peaks’ model).

The key question relates to what impact the ending of the Royal Commission will have on economic conditions. Both of the major parties have indicated that they accept its findings – but both seem keen to preserve some wriggle room for themselves ahead of the federal election. Fully implementing all recommendations would cause pain for key segments of both parties’ support base. This uncertainty about how exactly the report will be implemented makes it unlikely that credit conditions will improve over the short term. Beyond that, the financial services industry is facing into quite radical changes in terms of management, governance and operational structures. The rollout of these changes will limit the ability of the sector to act expansively. On top of this, the process of closing down one of the main thoroughfares of credit distribution (i.e. mortgage broking) will obstruct the inflow of loans to the housing market, at least temporarily. Despite all of these challenges, the fact that the Royal Commission is now over and its findings are out in the open provides us all with a good deal more certainty about the future shape of Australia’s financial system. The rebound in stock prices which followed the report’s publication demonstrates the advantage of knowing rather than fearing the worst.