SYDNEY (AFP) - A wide-ranging inquiry into the Australian finance industry will be held after an admission by the country's top lenders Thursday (Nov 30) that it was needed to restore faith in the massively profitable banking sector after a string of scandals.
The country's "big four" banks - among the developed world's most wealthy - have been under scrutiny in recent years amid allegations of dodgy financial advice, life insurance and mortgage fraud.
There have also been claims of anti-money laundering laws being breached and benchmark interest rates rigged.
Prime Minister Malcolm Turnbull has long resisted Labor opposition calls for a royal commission into misconduct, claiming it would be a waste of money, but mounting political pressure forced his hand with uncertainty over the issue hurting offshore investor confidence.
"The government has decided to establish this royal commission to further ensure our financial system is working efficiently and effectively," he said.
"It will not put capitalism on trial ... and we'll give it a reporting date of 12 months."
The big banks have previously been vehemently against any inquiry, arguing it would be an unnecessary distraction as they tackle global headwinds and disruption from technology.
But in a letter to Treasurer Scott Morrison shortly before Turnbull's announcement, the chairmen and chief executives of ANZ, Commonwealth, NAB and Westpac admitted it was now in the national interest.
"Our banks have consistently argued the view that further inquiries into the sector, including a royal commission, are unwarranted," the letter said.
"However, it is now in the national interest for the political uncertainty to end. It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people." The announcement sent bank shares tumbling, with the country's biggest lender, Commonwealth, leading the falls.
CMC Markets chief analyst Ric Spooner said they could remain under pressure for some time.
"The commission process is likely to result in a significant increase in regulatory costs for banks and other financial sector companies over the next 12 months, putting further pressure on the profit outlook," he said.
Last year Turnbull announced the big banks would have to face a parliamentary committee for an annual grilling to "drive cultural change", in a bid to address public discontent about their behaviour.
But pressure has since been building for a full independent inquiry, with a senator in Turnbull's Liberal coalition partner, the Nationals, preparing a private member's bill calling for a probe into the banks.
It had rapidly gained support, with Turnbull's announcement seen as the government avoiding the embarrassment of its own side compelling it to hold an inquiry.
The royal commission, which has been allocated A$75 million (US$57 million), will focus on the nature and extent of misconduct among banks, insurers, financial services providers and superannuation (pension) funds.
It will also consider how well equipped regulators are to identify and address misconduct, but will not look into other matters such as financial stability or the resilience of the banks.
The inquiry must report to the government within 12 months, with the person heading it yet to be announced.