A royal commission may recommend Australia's major financial institutions be prosecuted for charging customers fees for no service while criticising the regulator for letting it "snowball" into a $1 billion industry-wide issue, analysts say.
The regulators' powers and the way they have dealt with misconduct in the financial services industry will be examined by banking royal commissioner Kenneth Hayne QC, possibly in his interim report on Friday.
Citi banking analysts believe there is a high probability Mr Hayne will recommend the major financial institutions be prosecuted for both criminal and civil breaches of corporations law over fees for no service.
The analysts also expect Mr Hayne will find the institutions involved had poor culture and governance practices that need strengthening and that he will criticise the Australian Securities and Investments Commission.
"There is a high probability that Justice Hayne recommends the 'fees for no service' situation was allowed to occur and snowball into an industry-wide issue due to the lack of meaningful and effective enforcement from ASIC and other related regulators," a Citi research report said.
ASIC has secured hundreds of millions of dollars in refunds for customers charged fees for advice they did not receive and expects compensation across the industry to top $1 billion.
But ASIC's action was limited to court-enforceable undertakings, bans and imposing licence conditions until it launched civil proceedings this month against the National Australia Bank's superannuation trustees.
Counsel assisting the royal commission has recommended AMP face criminal charges for lying to and misleading ASIC over the fees issue.
The Commonwealth Bank has been labelled the "gold medallist" of the fees-for-no-service problems, which has included continued charges to deceased customers' estates.
Consumer advocates would welcome more active enforcement action from ASIC and the Australian Prudential Regulation Authority, but point out that ASIC in particular was affected by funding cuts in the 2014 budget.
Consumer Action Law Centre CEO Gerard Brody said he could understand the regulator opting for quicker outcomes through enforceable undertakings that delivered compensation to customers rather than going to court, given its limited resources.
"The answer to that is that we need greater resourcing for our regulators and also a greater direction for them to take that enforcement action," he said.
Mr Brody said the CALC will make further submissions to the royal commission highlighting delays and the way policy proposals get weakened, partly as a result of industry lobbying.
He said one way to address the issue was to give the regulator rule-making powers, as occurred in the UK.
The federal government this week said it is committed to ensuring ASIC has the powers it needs to take strong action to protect consumers from corporate and financial sector misconduct, as it consults on stronger penalties recommended by a taskforce last year.
It is not clear if the royal commission's interim report will include findings about individual case studies, including recommendations for prosecutions, or focus solely on policy issues arising from the first four of six rounds of public hearings.
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