Six months ago, the head of the Financial System Inquiry, David Murray, warned that the main pitfall facing the royal commission would be pressure to "drift from caveat emptor towards caveat vendor".
This could have profound systemic consequences for the entire industry, he added. In other words, if the legal framework applying to banking became predicated on "seller beware", the cost of credit could rise, and lending more scarce. That would slow overall economic activity and make financial institutions much more risk averse.
The royal commission has turned up victims of some very unethical bank behaviour, or even what appears to be outright fraud. But, as The Australian Financial Review warned in the lead-up to the inquiry, not every person or business foreclosed upon by a bank is a victim of bank bastardry. There were always going to be plenty of "victims" from the commission who really just lost out to circumstances, or poor judgment or the actions of others.
One set of these "victims" were borrowers foreclosed on by Commonwealth Bank after it took over Bankwest during the financial crisis in 2008. Agitation over this by rebel Queensland Nationals MPs was the primary reason why the Turnbull government was forced to concede to holding this royal commission in the first place.
On Monday, counsel assisting the royal commission, Michael Hodge QC, essentially shut down any further inquiry into the theory that CBA had impaired performing loans so that it could reduce the purchase price of Bankwest. Yet, as Aaron Patrick reports on Wednesday, for some of the most ardent Bankwest conspiracy theorists, the commission's rejection of their complaints seems to be taken as confirmation of a continued conspiracy against them.
On the same day the commission dispensed with the Bankwest conspiracy theory, Mr Hodge also pursued the case of Carolyn Flanagan, a legally blind pensioner who guaranteed a loan to her daughter and son-in-law to start a Poolwerx swimming pool supplies and maintenance franchise. The details are vague (Ms Flanagan's memory is failing) but the loan writing process was clearly a bit shonky. The commission honed into whether the bank had stuck to its own process and fully taken into account Ms Flanagan's disabled faculties when approving the intra-family loan guarantee. In the event, Ms Flanagan couldn't pay the loan back when her daughter and son-in-law defaulted.
Even if the loan was written with irregularities, the circumstances of Ms Flanagan's penury were not caused by the bank, but by the failed business of her relatives, who did not appear and whose names were suppressed, on the odd basis they'd had no chance to defend themselves. Yet surely the adult childrens' version of events - Ms Flanagan's daughter was present during at least one of the loan meetings - was more pertinent than a banker's poorly filled-in paperwork? There was no question that Ms Flanagan was happy to lend them the money.
In another of the commission's case studies, The AFR View, the customer complained to the ombudsman that he or she was lent too much money that couldn't be paid back. Again, the commission legalistically probed to see if the bank had broken its own guidelines.
There was always a risk that this royal commission could degenerate into a lawyers' picnic. Notwithstanding the fact that loan paperwork was filled out poorly, ambiguously or perhaps even fraudulently, at the heart of both case studies were people who were approved for loans that were then not paid back because a business went sour. More evidence may emerge, but this strikes at the heart of "buyer beware".
The commission now seems to be focusing on extending so-called responsible lending law into the messy world of business lending. That is a dangerous development that could dry up the supply of business lending if the liability for financial success of the borrower now lies with the lender. As recorded on our live blog on Monday, this point was acknowledged by Mr Hodge.
The royal commission is simply not well-placed to make systematic judgments on the system. Instead it risks falling prey to making rules based on the worst exceptions.Opinion - LeadersThis article was first published by: The Australian Financial Review Author: The AFR View