Australia financial shares surged the most in a decade after an inquiry into decades of wrongdoing stopped short of demanding a structural overhaul of the scandal-plagued industry or tighter lending rules that threatened to crunch bank profits.
While banks will face a tougher future with regulators empowered to crack down on wrongdoers, the 76 recommendations in the Royal Commission’s final report were widely seen as a reprieve for the banks, which had been battered as the probe unearthed a string of scandals from charging fees for no service and pushing people into poorly-performing products to meet bonus targets.
Commonwealth Bank of Australia, the nation’s largest lender whose many scandals helped give impetus to the inquiry, jumped 4.7 percent, it’s biggest one-day gain in almost nine years. Westpac Banking Corp. surged 7.4 percent, for it’s best day in more than a decade. Australia & New Zealand Banking Group Ltd. climbed 6.5 percent.
National Australia Bank Ltd., whose top executives were lashed by Commissioner Kenneth Hayne for failing to accept criticism or the gravity of its wrongdoing, lagged its rivals with a 3.9 percent gain.
The rally added about A$20 billion ($14.5 billion) to the market value of the big four banks, and helped push an index of financial stocks to its biggest gain since March 2009. The benchmark S&P/ASX200 Index climbed 2 percent, its best day in more than two years.
“The soft recommendations of the Royal Commission final report is a clear win for the banks,” UBS Group AG analysts led by Jonathan Mott wrote in a note. “We do not believe that any of the 76 recommendations by themselves will have a material financial impact on the banks.”
In his 1,000-page report, Hayne lambasted senior bank executives, said the fees-for-no service scandals could lead to criminal charges, and urged the securities regulator to get tough and start considering prosecution rather than negotiation as its first step.
But he steered clear of recommending financial firms be forced to split off financial advice and wealth management units to avoid the conflicts of interest that were at the heart of much of the wrongdoing.
“Enforced separation of product and advice would be a very large step to take,” Hayne wrote. “It would be both costly and disruptive. I am not persuaded that it is necessary to mandate structural separation between products and advice.”
That’s a boon for wealth managers AMP Ltd. and IOOF Holdings Ltd., which suffered some of the biggest reputational and share price damage during the inquiry. Both companies rallied Tuesday, with AMP gaining 10 percent, and IOOF jumping 8 percent.
“The report is not as stringent as people might have expected,” said Eleanor Creagh, Sydney-based Australian market strategist at Saxo Capital Markets. “I don’t think that the Royal Commission did anywhere near enough to cover what’s needed there.”
In another win for banks, no changes will be made to responsible lending laws, such as enforcing closer scrutiny of a borrower’s spending habits. UBS had estimated that a move to full expense verification by banks could reduce maximum borrowing capacity by about 30 percent, creating a further drag on the property market. Prime Minister Scott Morrison had also warned that tighter lending rules could have triggered an economically damaging credit freeze.
The government said it would act on all 76 recommendations, including setting up a new body to discipline errant financial advisers and creating an independent panel to ensure regulators do their job.
It wasn’t all good news for financial firms, with mortgage brokers hit by the abolition of trailing commissions. Shares of Mortgage Choice Ltd. slumped 25 percent and Australian Finance Group Ltd. plunged 29 percent.
–With assistance from Jackie Edwards and Matthew Burgess.
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