The Turnbull government has moved to pay back Labor for helping force it into a humiliating backdown on a royal commission into the financial services sector by having the inquiry look specifically at industry superannuation funds and their union-dominated boards.
The payback is contained in the terms of reference for a $75 million, 12-month royal commission which Malcolm Turnbull and Scott Morrison were forced to call after being unable to stop a commission of inquiry being established by rebel Nationals MPs with the support of Labor, the Greens and others. It is slated to begin in February.
But the move to square up with Labor could result in a delay in establishing the commission, with the opposition signalling a parliamentary fight over the terms of reference which need to be legislated. The Greens also want changes.
After almost two years of resisting internal and external calls for a royal commission, the Prime Minister and Treasurer conceded the government had lost control of the Parliament by being unable to stop the rebel inquiry, the legislation for which was to be introduced on Thursday morning, and which had the numbers to pass both houses.
“People are recognising that the nature of the political environment has created a sense of inevitability about an inquiry,” Mr Turnbull said.
The royal commission, they said, was needed not because there was anything wrong with the banks, but because the ongoing clamour for an inquiry was harming both the sector and the economy more broadly.
“The nature of political events means the national economic interest is now served by taking what I describe as a regrettable but necessary action,” Mr Morrison said.
“Politics is doing damage to our banking and financial system, and we are taking control as a government to protect the strength of our banking system through a properly constituted inquiry on these terms of reference, rather than the alternatives present in other commission of inquiry proposals, subject to the vagaries of politics that would do harm and already has to date.”
In what one Coalition source confirmed was “a direct smack at Labor”, the terms of reference would allow the commission to take aim at industry super funds. The government is currently struggling to find Senate support for a bill on governance arrangements for industry funds to weaken the union presence on their boards.
The move was described as “absurd” by Industry Super Australia. Labor warned the process must have bipartisan support and signalled it may push for changes.
“Turnbull and Morrison have acknowledged that they’re only calling a royal commission into the banks because of Labor,” shadow treasurer Chris Bowen said.
“Well they should complete the capitulation and consult with us on the terms of reference and commissioner appointment. The best way to end the political uncertainty is to have royal commission terms of reference and appointments that enjoy bipartisan support.”
The terms of reference for the royal commission are less extensive than those contained in the private members bill by Nationals Senator Barry O’Sullivan and which senior minister Peter Dutton described on Thursday as “calling for all sorts of crazy things”.
Senator O’Sullivan told The Australian Financial Review he was happy with the outcome and that Mr Turnbull should not be regarded as weak for backing down.
Warning to the leadership
But he cautioned his revolt should serve as a warning to the leadership that the Nationals and other conservatives should not be taken for granted.
Nationals MP George Christensen, who was going to cross the floor to support Senator O’Sullivan’s bill in the lower house, said it was ” a great outcome” but “I just don’t understand why it took, you know, a number of National Party backbenchers to drag the Prime Minister kicking and screaming to this decision’.
Labor leader Bill Shorten said “we now have a Prime Minister who has lost control of his party”.
“Malcolm Turnbull has lost control of the Parliament”.
The government announced the royal commission on Thursday morning after Mr Morrison was advised the previous evening by Reserve Bank governor Philip Lowe and Australian Prudential Regulation Authority chairman Wayne Byres to take control, “given the uncertainty, disruption, and damage being done by political events”.
The big four banks had also raised the white flag.
After talks all week with the government, the chairmen and chief executives of the big four banks wrote to Mr Morrison on Thursday morning asking for an inquiry to end the political uncertainty and restore public trust.
Although the banks had vehemently resisted calls for a royal commission since earlier last year when it became Labor policy, a feeling of relief washed over the sector as senior bankers welcomed the government taking control of the inquiry.
The financial services sector is “too important to leave to being a political football”, Westpac Banking Corp CEO Brian Hartzer said. While the bank “has consistently argued and continues to believe that a royal commission is not necessary, in the current circumstances it is now more important that the financial sector can continue to operate effectively and with certainty.”
However, there was also a sense of trepidation in the banks, and among investors, that the royal commission will use its wide terms of reference and extensive investigatory powers to uncover lending practices that could lead to recommendations that will constrain banks’ pricing power.
The royal commission could also constrain house price growth as the banks were forced to tighten credit in the face of more scrutiny on responsible lending, senior bank analysts said. This could lead to “a rationing of credit, smaller mortgages, lower loan growth and a consequent moderation in house prices,” said JCP Investment Partners head of financials research, Matthew Wilson.
UBS analyst Jonathan Mott said each major bank will face an additional $50 million to $100 million in costs as they defend themselves against a “distracting” commission and it was difficult to predict what the final recommendations would be.
Bank shares opened sharply lower although recovered some of those losses in the afternoon session on the ASX. Commonwealth Bank fell the hardest, closing down almost 2 per cent to $79.43. ANZ finished the session 1 per cent lower at $28.46, while Westpac and National Australia Bank were almost flat.
Interest rate warning
Australian Bankers’ Association chief executive Anna Bligh welcomed the government taking control of the inquiry, which was “too important to put into the hands of minor parties and fringe elements of the Parliament”.
However, she warned the royal commission could force up interest rates. The inquiry “runs the risk that Australia will be seen as a more risky investment by global investors that can go anywhere. The risk is that they don’t invest or suspend their investment in Australia or they put a premium on the price of those funds,” Ms Bligh said.
Chief executives from outside the banking sector said the royal commission set a regrettable precedent.
“I think it is a disappointing distraction from other things that require attention at the moment,” said Wesfarmers managing director Rob Scott. “So it is disappointing to hear and I hope it doesn’t undermine investor confidence into our banking system. I think it is just an unnecessary distraction and will cost a lot of tax payer money.”
The smaller banks urged the commission to not only examine conduct and culture but whether policy settings are supporting competition.
“We acknowledge there’s been a lot of tension around misconduct in the banks and we hope the commission looks more broadly at competition, rather than just focus on areas of bad behaviour,” said Bank of Queensland chairman Roger Davis after the AGM in Brisbane on Thursday.
The Australian Finance Sector Union’s national secretary, Julia Angrisano, warned about “ordinary bank workers [being] thrown to the wolves by bank executives” and said the government must guarantee the banks will have “zero involvement in drafting the terms of reference”.
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