Following much pressure from the Opposition (and some from within his own party), the community and the big four banks themselves, yesterday morning Prime Minister Malcolm Turnbull called a bank royal commission. It is estimated to cost $75 million and last 12 months, but what will this Commission be tasked to do? And what will it do to your portfolio?
1) The remit

Point 1) of the terms of references states: The Commission must inquire into the following matters;

a) the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf);

b) any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations;

c) the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members
Part c) is interesting as it catches up superannuation funds into the whole exercise, something that the Opposition, and industry superannuation funds, are not too happy about. These terms of reference need to be legislated though, so expect a fight from Labor on this one.
2) International practice

Moving onto f) the inquiry is also tasked to inquire into the adequacy of:

i.existing laws and policies of the Commonwealth (taking into account law reforms announced by the Government) relating to the provision of financial services;

ii.the internal systems of financial services entities; and

iii.forms of industry self-regulation, including industry codes of conduct;
This is further clarified in point 3 which says:
3) Inquiring into the matters set out in paragraph (1)(f), the Commission:

a) must have regard to the implications of any changes to laws, that the Commission proposes to recommend, for the economy generally, for access to and the cost of financial services for consumers, for competition in the financial sector, and for financial system stability; and

b) may have regard to comparable international experience, practices and reforms.
Does this mean if another country does it then we should be able to do it too? I guess we’ll find out.
3) Bank stocks

The four major banks, and other financial institutions, fell sharply on the announcement Thursday morning but have recovered quite a bit since. If the Government can get its terms of reference legislated without many changes, then it shouldn't have too much impact on your portfolio for the time being. There will be some uncertainty, and possibly rising interest rates as Australian banks may find it more difficult to borrow funds offshore, but the biggest impact will depend on what the Commission's report reveals.