The fallout from the royal commission for mortgagees

All the Juicy Things You Need to Know about the Fallout from the Royal Commission

Over the last decade, Australia’s big banks have been embroiled in scandals. One such scandal was Commonwealth Bank’s financial planning scandal. Customers were misled by the bank’s financial advisers who recommended investments which resulted in losses of millions of dollars. The financial planners were also accused of overcharging fees, creating investment accounts with authorisation from the customers, and forging signatures. This scandal was one of the many that triggered the recommendation for a royal commission.

What is a Royal Commission?

A royal commission is an independent public enquiry. It is led by the state or federal government. The royal commission into banks was established last December 2017. It will conduct research and investigation about alleged misconduct in the banking, superannuation, and financial services industry.

What are the adverse effects of the Royal Commission?

While the Royal Commission was established in the hopes for greater ethical treatment of bank customers, lenders and experts are seeing some fallouts in the process. Here are some of them.

  • It created uncertainty in the market.

The public hearings for the royal commission have already concluded, and the reports will be submitted in February 2019. It is expected that there will be new rules and legislative changes and updates following the royal commission into banks, and this is creating uncertainty in the market. The changes may take longer to be fully implemented, and Australia’s leading lenders and mortgagees believe it may lead to slower market growth in the field of lending.

  • It may affect the demand for property.

One of the Commission’s finding is that the current processes of mortgagees in assessing a borrower’s capability to pay are flawed. This has seen banks requiring more details and information on the borrower’s income and expenses. This stricter process may result in a decline in home loans, and may mainly affect the “marginal” borrowers, those who are less financially stable and less affluent.

  • It may cause banks to overreact.

One of the possible effects of the Royal Commission is that it may cause banks to be less aggressive in offering loans and financial products. Why should they risk offering financial products and investments to customers who may not fully understand the implications that come with it? Why should make loans that have the possibility of going bad? The supply of credit in the market depends on banks willing enough to take risks, to balance the pros and cons of lending.

  • Small businesses will have lesser access to credit.

The stricter process and tightening in lending will also affect small businesses, who will find it difficult to make loans and credits. The lack of funding can cause small businesses to lose employees, or worse, to close down. Aspiring entrepreneurs may also find it hard to jump-start a business due to lack of access to funding and credit.

The drawbacks or disadvantages of Royal Commission brings may seem daunting, but what it will hopefully achieve is that banks will operate at a higher moral standard shortly, and be more customer-centric.