How The Banking Royal Commission Will Change Our Financial System
So you're worried about the impact of the banking royal commission findings? We got experts to weigh in on what you should do.
The long-awaited recommendations of the banking royal commission will be handed down on Monday. Banks are already tightening their rules around lending, and some politicians have raised fears the repercussions of the royal commission could have severe repercussions on the wider economy.
Prime Minister (and former treasurer) Scott Morrison warned last week further cuts to lending would have "quite significant" consequences on the financial system.
"The easiest way to ensure nobody gets hurt is to lend nobody any money. But if nobody gets lent any money then everybody gets hurt," Morrison told the Sydney Morning Herald.
Treasurer Josh Frydenberg said in December that further reluctance to lend "could disrupt the healthy levels of household spending and investment".
So while we wait for the recommendations of the royal commission to be adopted (or not) by the government, and for the effects of these changes to become clear, you might wonder if it's time to change your investments or just take a closer look where your money is going -- especially if the naysayers are right, and the wider economy takes a ding.
Work on your credit score
"Most people are fairly static and stuck in their current financial services arrangement, or reluctant to look around," Dr Andrew Grant, of the University of Sydney business school, told 10 daily.
"It's important to understand there are better offers out there if they're willing to negotiate in certain ways."
Grant said many Australians had no idea about their credit score. He said by improving your credit rating, people could negate the impacts of tighter lending restrictions or reduce their liability if interest rates suddenly dramatically change.
"Ideally, you'd either pay off existing debts, especially credit card debts, and consolidate debts," Grant said.
This is the biggest tip from experts. Markets may take a dip in the hours or days after the recommendations are handed down, and some people might feel an urge to buy or sell investments in a panic.
"If we see a market shift, it will likely be uninformed traders. Mum and dad investors should turn the TV off. Ignore it in the short term," Dr Simone Kelly, associate professor of finance at Bond University, told 10 daily.
"There will be informed traders and uninformed traders, and the big danger is short sellers who manipulate the market to make themselves again. "
Vince Scully, the founder of financial advice service LifeSherpa, agreed.
"Do nothing straight away. That's the best piece of advice," he told 10 daily.
"There will be some form of reaction, but reacting to these things generally ends up costing people money... Knee-jerk reactions to these things generally do cause losses."
Scully said Monday was "probably not a good time to be making big bets, up or down", while Kelly also said it was likely that investments would return to normal.
"I would be looking for prices to go down [on Monday], and they will come back up," she said.
"Don't do anything today or tomorrow," Scully added.
Get a 'health check' and do your homework
The findings of the royal commission have shocked many, with dodgy practices revealed at many trusted institutions.
Considering more people now have a clearer idea of how their money is handled by experts, and with possible turbulence in the market to come, now is a prime opportunity to re-evaluate your financial position -- and learn more about where your money is going.
"There will be opportunities for people to really take control of their personal finances, it’s a big wakeup call," Grant said.
"At the very least, you can learn a few things about what drives your credit and what makes you a good candidate for loans."
The customer needs to decide how to best take advantage of changes that might come in, Kelly said, and "that includes being willing to shop around."
Kelly also said there was a need for more knowledge among the wider community.
"Here's an opportunity for investors to get educated and start afresh. I hope the report will come out with recommendations to make the system simpler and reduce the number of products," she said.
"It is a wakeup call. If you don't understand what's being offered to you, walk away."
Be prepared and know your options
Grant said people could look at putting more voluntary contributions into their superannuation account, or investing in a low-cost managed fund or exchange-traded fund.
Laura Crowden, a spokesperson for financial comparison service iSelect, said further tightening of loan restrictions meant people may have to provide more information in their applications than ever before.
"Home loan applicants might be having gym subscriptions, Netflix subscriptions and more all taken into account when applying for a loan, and possibly preventing them from getting the loan they want," she said.
Crowden said applicants, especially those wanting big loans for property, needed to be more prepared.
"You need to look closely at your expenditure, and cut down services to cut down disappointment," she said.
"You need to be more prepared than in the past, and give as much detail on your living expenses as possible. Last year it might have been just one line of detail, now it could be expanded to 12 categories."
With changes incoming, Kelly said people should get ready for what could be a new era in Australian's financial system.
"Maybe it’s time to simplify your financial affairs. Maybe work more on a cash basis, maybe be more realistic if you're worried about someone doing better than you," she said.