The floodlights provided by the banking royal commission have rattled the nation. Misconduct appears to be widespread – not just confined to one institution – coupled with the perception that the corporate cop, ASIC, appears to have only been able to use existing laws that are not strong enough. Understandably, there is a very strong likelihood that the commission will need to be extended beyond the original time of September 2018.

Important lessons

While it is still very early days in the banking royal commission, there are already lessons to be learnt and reforms to be contemplated.

First, there appears to be very serious problems of misalignment between the customer and the bank, given the vertical integration of the banking system.

Second, the existing powers of ASIC appear to have been less than effective in preventing patterns of illegal behaviour, and worse still, to remedy breaches in law. Perhaps the powers our financial regulators exhibit are not tough enough to effect the changes that are needed? Strong and effective laws, with real teeth, are needed to rebuild trust and confidence in the financial system.

Third, the inquiries and reviews into the financial sector (such as the Financial System Inquiry) appear to have come in the wrong order. The royal commission should have been the first means to de-politicise the issues that have dragged on for years regarding banking and financial advice scandals.

Fourth, trust in our institutions, including financial firms, must now be at all-time lows. Recent royal commissions into the trade unions and child sexual abuse are also recent cases in point. This is incredibly sad.

Fifth, the financial advice industry has long had issues of educational standards and professional proficiency. The revenue model of firms operating in the financial planning industry needs to be better aligned to client outcomes. Improved disclosure, professionalism and 21st century principal-agent relationships are needed fast.


Sixth, there is a very real risk that negative sentiment might spill out into the broader financial system. This is something that is yet to play out, and won't be fully known until the Hayne royal commission reports to government.

Seventh, overall Australia has genuine world-class financial regulators. We should draw comfort from this. But what we don't need is interference that is politically motivated, where our financial regulators are compelled to meddle in the minutiae of financial entrepreneurship.

The banking royal commission still has a long way to run. It has already proven itself to be the most effective vehicle to bring about genuine reform. I have no doubt that these special powers entrusted to the royal commissioner, Kenneth Hayne, will be the much-needed catalyst for significant and genuine reform in financial services industry.

My only fear, though, is in the politics in effecting such reforms. Let's hope our politicians don't ruin this important chance.

David R Gallagher is the former CEO of the Commonwealth Government's Centre of Excellence in International Finance and Regulation (CIFR) and is a senior professor of finance at the Sydney Business School at the University of Wollongong.