Banks to repay fees for work they didn't do. Big deal.

So the banks are going to refund their customers for work they were paid to do but didn't. Marvellous.

Simple as that; repaying fees for a service that wasn't delivered some time ago and then only after a change in the law and a rather arduous and expensive investigation forced the issue.

Once the Australian Securities and Investments Commission tabled its quaintly titled "Financial advice: Fees for no service" report, the banks all made a virtue of the fact they dobbed themselves in, or as they called it "self-reported".

Maybe, but ASIC deputy chair Peter Kell had a slightly different spin on things.

Mr Kell argued the whole ugly and cynical mess would not have surfaced if the Future of Financial Advice reforms - reforms the banks had strenuously argued against - had not been introduced.

At the time the banks protested the reforms were an unnecessary financial burden that would be ultimately passed on to their customers.

One could argue that paying for something that you didn't receive could be viewed as an unnecessary financial burden.

Compensation limited to interest payments

Nonetheless, the banks will be obliged to pay a small amount of compensation on top of the refund.

The compensation element of the package is interest foregone by the customers on the money the banks skimmed off for providing advice that was never given.

You can bet the banks - not to leave AMP out of this - didn't just plonk their ill-gotten gains in a term deposit earning trifling interest.

The $180 million or so the banks have fessed up to so far relates to a reasonably narrow period of time; August 2013 to December 2015.

ASIC had a deeper look at the practice of charging customers for non-advice and, given the deeply entrenched nature of the practice in financial institutions, not unreasonably asked itself "maybe it goes back further?"

So it set banks a bit more homework, checking back another seven years from the original 2015 starting point.

That is not an arbitrary number.

Seven years is more like the statute of limitations in this case, the length of time Australian Financial Services licence holders are obliged to hang on to records.

One could reasonably argue the lurk has been going on for aeons, but seven years it is legally.

$180 million payment is likely to more than double

Simple maths would suggest if a bit over two years squeezes $180 million out of the banks, another five years will squeeze a fair bit more.

And that's just repaying the costs of services not delivered.

Could there have been other costs incurred, but not recognized by advice-free advisors?

The new investigation winds the clock back to July 2008, just when the global financial crisis was starting to pulverize markets; investment bank Bear Stearns had already gone under and in two months the rather more systemically important Lehman Brothers collapsed which would really get things rolling.

It was fear, panic and wealth destruction on a scale never seen before. Just the place cool heads and sage advice could help investors fearing the loss of their financial future.

Meanwhile what were a fair chunk of the big Australian financial institutions' advisors doing? We don't know yet, but it is not difficult to extrapolate their efforts from August 2013 to December 2015 and suggest for a lot of their paying customers, it was stuff all.

In economics there's the elegant concept of opportunity costs; the benefit someone has given up by taking a different course of action or, in this case, inaction.

It is impossible to calculate the opportunity cost to customers paying for advice that never came during those brutal years after July 2008, but repaying fees for the advice that never came plus interest doesn't seem to cover it.

Of course, that is assuming the financial institutions - which as ASIC pointed out had their priorities fixed on fee generation and relied on automated periodic payments - would have provided decent advice rather than blasé indifference in the first place.

That's perhaps unfair.

One financial institution cited in the ASIC report thought three unanswered phone-calls to a client constituted "advice", so that is not total indifference, but close to it.

No windfall for customers failed by the banks

ASIC also noted that a degree of the banks' early efforts to identify those affected failed because many didn't have accurate or complete records about their clients.

The whole process is being slowed down, as the ASIC report pointed out, because much of work is now being done manually; the banks didn't have adequate data and systems in place.

Clearly that's not where the gouged fees were being spent.

Shareholders could quite reasonably ask how did this systemic failure occur - and why is the mess so difficult to clean up - given the hundreds of millions of dollars of their capital is spent on IT upgrades every year.

As for customers who have been ripped, err ... paid for services that weren't delivered, how does the $180 million and counting compensation stack up?

It varies.

The Commonwealth Bank - given it faces by a long way the biggest payout - is a good place to start.

The two punters so far identified in the CBA Securities Limited business look like they'll be getting back around $70.

For the 5,000 or so who didn't get advice from the CBA's Count Financial business it works out at an average of $220, while the 40,000 signed up to Commonwealth Financial Planning Limited look like splitting up $100 million - or around $2,500 per head.

CBA has been pretty slow out of the blocks, paying just 0.5 per cent of what they (so far) owe their customers, compared to NAB which has shelled out around a quarter, while AMP and ANZ have paid about half.

Westpac has returned virtually everything it says it has to, but then again its liabilities are rather dwarfed by the others.

Nonetheless, the $180 million plus interest shouldn't cause too much bother given the banks and AMP should have a collective profit somewhere way north of $30 billion this year.

If there is one tiny bit of joy for customers who paid for advice they never received, it is in the compensation that may be coming on top of the refund.

ASIC has suggested - particularly for those institutions who have no idea exactly what they owe - that consumer price inflation (around 2 per cent) plus another 6 per cent would be a fair enough way to calculate interest penalties.

That is likely to be a fair bit better return than the banks' fee-driven financial advisors have managed to achieve over the past seven years and certainly a much better outcome than if they'd ploughed the money into one of the banks' term deposits which are currently not even paying 3 per cent.

photo Banks to repay fees for work they didn't do. Big deal. images

photo of Banks to repay fees for work they didn't do. Big deal.

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