A ringaround of the country's analysts reveals that most think that the scope of the Royal Commission into banks and financial services focusses too much on misconduct at the expense of corporate structure.
The banking specialists are convinced that the Royal Commission should turn a spotlight on stock lending, vertical integration and the creation of credit to the underbanked - issues which have been completely ignored.
The scope of the Commission is very broad but so too are the carve-outs, according to Citi's Craig Williams.
"Being primarily focused on misconduct issues - or where community standards are not being met - will likely make the Royal Commission backward looking and focused on issues that occurred some years earlier," he said.
However, in his view the carve-outs mean the Royal Commission won’t overlap with any existing inquiry or investigation.
“This should remove high profile issues like Commonwealth Bank’s Austrac case and Westpac’s alleged swap rate rigging case."
To him, the political concerns have seemingly become overwhelming – neither the Government nor the banking industry has been able to adequately address the concerns of the community.
Still, market players have the slammed the Commission's terms of reference for being too narrowly focussed – which is clearly good for the banks and good for Canberra.
However, they remain convinced that a change of government will see a one-and-a-half page document very quickly expand into a longer version with the time-line being pushed out much further.
“The Commission is really designed to try and pass the pub test - the problem is that the terms of reference are overly concerned with misconduct and are not tackling bank corporate structure and the conflicts of interest that arise from that," one analyst said.
“It is abundantly clear they don’t want to touch the structure issue by not mentioning it which is a massive problem.”
Conflict of interest
While there is no call out on vertical integration between banking, wealth management, insurance and superannuation, the analyst went on to say that any conflicts of interest would force the Commission to look at corporate structures.
"This is particularly where these businesses are vertically integrated with tied advisers selling house products, but purporting to be independent.
Another potential conflict of interest for the financial services specialist is where superannuation funds lend stock to market players who are short sellers.
“If superannuation funds are looking for upward moves in share prices, lending out that same stock to short sellers - to push the price in the opposite direction - is a conflict.”
Now, obviously, one can argue that the superannuation fund gets a better deal as they get a return, plus a margin, from the profits realised by the borrower.
But the analyst is saying that if a stock lender is unable to settle a trade, there could be unintended consequences.
Generally speaking, stock lending is a non-zero-sum game with the superfunds gaining as much from the deal as the borrower
Further, since most superfunds are mandated to take in cash income and not shares held under a DRP, they can profit from selling these shares to stock borrowers - who then trade the stock at a premium right up to the date the shares go ex-dividend.
What's important here is not that these deals are done, according to the analyst.
The issue is that stock lending reports to the corporate watchdog are inadequate and should be scrutinised by the Commission.
"The stock lending rules were introduced post the GFC and the market has changed dramatically since then."
"But, of course, any changes to the reporting regime would have a big impact on trading."
Also, the scope of the Royal Commission has not been widened to include credit creation – rules to ensure that everyone in the community has access to credit.