I originally thought the Financial Services Royal Commission was unnecessary. Then I heard the evidence, and I changed my mind. Having read the recommendations of Commissioner Hayne, my first opinion might as well have been right. We’ve got very little that is useful, and much that will be harmful.

The motives for the commission were never pure.

On the one hand, you had Labor, who had itself rejected a banking inquiry, channelling public hatred for bankers, insurance salesmen, financial planners and superannuation trustees, at the government through calls for a Royal Commission.

On the other hand you had the government, which genuinely believed there was nothing to see, resisting until the pressure became too great. They did the politically smart thing and folded. Can’t blame them for that. But their appointment of Kenneth Hayne was a complete mistake.

Banking and finance is a complex area, and it appears that our system, while far from broken, could do with some fine-tuning. Hayne might have been a High Court judge, but he seems singularly lacking in commercial understanding. And he is a lawyer. Lawyers are better at tearing things down than they are building up, or reconstructing.

Reconstruction is what our financial system needs.

Hayne’s major value is that he has identified some wrong-doers and recommended their prosecution, and has forced the resignation of a number of financial institution directors. That gives us some return out of the exercise, but not a lot.

The old boy and not-quite-so-old girl network is virtually unscathed and bank investors banked a nominal $19 billion as share market valuations rose across the board.

One reason valuations rose is because there were few structural changes relating to banks, apart from the recommendation to ban bank commissions to finance brokers (and this will enhance the value of the big four because it will reduce competition amongst lenders).

The commission talks a lot about culture and the need to change it. Its solution is legally enforceable industry codes of conduct and restrictions on remuneration. These are unlikely to achieve anything.

High flying executives will always be motivated by remuneration, and no matter how it is dressed-up, the bottom line is really the only measure of executive worth that most companies care about.

And industry codes are already in place. While Hayne wants them to be legally enforceable, one of the problems in banking has been the unwillingness of regulators to enforce anything.

The major cultural issue is the All Finanz model under which banks combine banking, insurance and financial services. All of these activities have different risk profiles and attitudes, and they don’t belong together.

The aim of banking is to lend money, and never have to foreclose. Foreclosure is seen as a failure by the lending officers. Banks make a small amount of money on each loan compared to what is outstanding, and they need to be able to return interest and principal to the depositor at some stage.

Insurance is the business of pooling risk. You don’t assess the customer’s ability to pay as that is irrelevant as long as they make the premiums. If they don’t pay, then the contract is ended, or never starts. And there is a certainty that the insurer will pay out at some stage on some proportion of their portfolio. It also has a more aggressive sales culture: a large proportion of insurance has always been driven by salespeople, often going door-to-door.

And then there is stockbroking and other wealth management services. Again, the attitude to risk is different, but quite dissimilar to that of a banker.

So, in my view, the commissioner should have recommended untying the All Finanz structure, which is a product of only the last 20 or so years, although this would have been a stretch on his terms of reference, because that is where the real cultural conflicts are likely to be occurring.

This could have been done by recommending that the federal government withdraw its guarantee of deposits under $200,000 for any institution that combines lending with other financial services. That would force them to choose between being All Finanz whales, or mere deposit-taking and lending elephants, and put the depositor on notice of higher risk inherent in the aggregated model.

Basic lending ought to be a boring, moderately well-paid, business, run by people who want to sleep well at night. Home and business lending should not be mixed-up with merchant banking and other investing and capital raising activities.

Finance broking also fits under Haynes cultural issues, but here he has a number of misconceptions. I was a finance broker 35 years ago, when the industry was in its infancy, and when fees had to be charged to borrowers for mortgages, but when we could get a fee from the lender for lease finance. That meant you arranged a lot of lease finance, but not much mortgage finance, even though the benefits were the same for the borrower in each area. The difference was the psychological pain in paying up front.

Brokers provide a valuable service. Borrowers can, as Alan Kohler argues today, go direct to a lender, and there are plenty of vanilla borrowers who do just that. Which means that the 40 per cent that go to brokers are likely to have more complex requirements.

Multi-millionaire journalists may think that all lenders are basically the same, but they aren’t. There are wrinkles in their lending practices, as well as their appetite for risk in particular areas. If you are in the market every day organising loans, then you understand these wrinkles which can be worth quite a bit to a borrower, particularly if it means the difference between getting a loan and not getting one.

When I was broking we used to dream that the industry would be like the general insurance industry, where insurance brokers, some of them very large corporations, were paid directly by the insurers, and the insured couldn’t get it more cheaply by going direct. In fact, many insurance brokers got better rates for their clients than the clients could themselves because of volume or underwriting arrangements.

I haven’t heard any complaints about conflicts of interest in the general insurance market. Anyone who uses an insurance broker realises the broker is selling a product, and just as there is competition between lenders there is also competition between brokers. Conflict of interest exists in just about every commercial relationship, but you can’t manage it by trying to abolish it, because it can’t be abolished and will literally always be there in some form or another.

But without the brokers, the competition on the banks would be much less intense. Brokers keep the banks honest, because they recommend from a panel, not just from one bank. And they also operate as a de facto distribution network for smaller financial institutions, increasing the number of viable lending institutions.

Hayne thought the broker is conflicted by the “trail” commission (a part of the total commission that is paid over the life of the loan), but this is another non-sequitur. Once the bank pays the commission it is almost irrelevant whether it is paid in one lump sum, or over a longer period of time. The trail commission is a check to ensure that brokers aren’t enticed to churn loans between lenders, and that if the borrower does terminate the loan early for some reason the broker shares in the pain with the lender.

There is one caveat that I would put on finance brokers, and that is that they should never be owned by a bank, as Aussie Home Loans is.

Another mistake that Hayne made is to recommend special conditions for rural lending. Rural lending is difficult, and there are only a small number of financiers who get involved in it. Stopping banks from charging default interest, and forcing them into mediations, potentially makes the business even riskier for the lender.

What that means is not better conditions for borrowers, but fewer borrowers and higher interest rates as some lenders limit the risks they will take, and others vacate the field altogether. Agriculture is an internationally exposed industry, and the last thing it needs is an inflexible finance system.

There was one good thing to come out of the commission, and that was the recommendations on superannuation: to appoint directors on the basis of merit, not union or employer representation; and that employees should only have one default superannuation fund.

The ALP has resisted government moves to ensure superannuation funds have independent directors, so Hayne may put them in a position where they now have to reverse their position. And ensuring employees have only one default fund would be good for workers and break the dominance in the super field of Industry super funds, which are for all practical intents and purposes union super funds, have.

However, Hayne does not have a mechanism for how this might be achieved, so watch for the unions to use this to fight back.

Economists tend to focus on economic settings when analysing what makes an economy tick, but that is only a part of the story. The strengths of Western, and Westernised, economies is their high levels of trust; scientific, industrial and cultural innovation; and the way we pool resources to meet commercial ends.

A healthy banking sector is part of that. It is a guardian of trust in the monetary system, and an integral cog in the machine of pooling and sharing resources for commercial ends, including innovation.

It’s long due a proper overhaul, but the Hayne Financial Services Royal Commission wasn’t it. Perhaps before too long a proper inquiry, run by a multidisciplinary team, could be convened to do a proper structural overhaul, with broader terms than Hayne, and in a less politicised environment.