Following a letter from Australia’s four major banks urging a royal commission into the financial services sector, the government has this morning agreed to establish a commission.

In a joint statement today, Prime Minister Malcolm Turnbull and federal treasurer Scott Morrison said: “We have one of the strongest and most stable banking, superannuation and financial services industries in the world, performing a critical role in underpinning the Australian economy.

“Our banking system is systemically strong with internationally recognised world's best prudential regulation and oversight.

“Ongoing speculation and fear-mongering about a banking inquiry or royal commission is disruptive and risks undermining the reputation of Australia’s world-class financial system.”

Speaking early this morning at the Association of Superannuation Funds of Australia conference and prior to the government’s announcement, the CEO of the Australian Bankers' Association, Anna Bligh said Australians have an “extremely high level of trust in their banks, in their superannuation and in the financial sector”.

However, responding to questioning from ASFA CEO Dr Martin Fahy around whether Australia’s “crisis of confidence” in the financial services sector was “real” or something that had been triggered by “political opportunism” and “media interest”, Ms Bligh said it was a bit of everything.

She argued that it’s “important to look not only in our own backyard” and said that internationally, the historic “major pillars” that societies have relied on including the media, the government and corporate services have all suffered a “significant diminishing of trust globally”. She said the financial services and banking sector is part of the corporate sector.

When the news broke in the final minutes of the session, Ms Bligh said: “If superannuation and the entire sector is included… I would expect that banks will be pretty much front and centre. The thing about commissions of inquiry: I’ve called them. I’ve given evidence in them and they don’t always go the way that people think they might when they go out.”

Where did the royal commission come from?

The Turnbull government’s decision to establish a royal commission follows months of talking the possibility down and a letter this morning from the four major banks.

The letter tabled by ANZ, the Commonwealth Bank, Westpac and NAB urged the government to “act decisively”.

The combined chairmen and CEOs wrote: “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. It also risks undermining the critical perception that our banks are unquestionably strong.”

According to the draft terms of reference, the commission will look into banking, superannuation and financial services industries and will specifically inquire into: “The use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members.”

It will also question whether any findings are attributable to cultural, governance, risk management, recruitment or remuneration practices.

However, the statement from Mr Turnbull and Mr Morrison said that the Commission won’t be “an inquisition into capitalism that some have called for” and will have a “conventional” approach.

“It will not be a never-ending lawyers’ picnic.”

Ms Bligh continued: “I do think there is a very real questioning of institutions that I don’t think we’ve seen [since] before my lifetime. But I do think there’s a lot of conflation happening as well.

“Recent work that the ABA has done has shown that Australians trust the financial sector with their money and their privacy of their data much more keenly than they do trust any government agency, so there are high levels of trust on some things.

“Where the trust is breaking down is on the confidence that consumers have on whether or not corporations are getting the balance right on the interests of the customer and the protection of the customer versus the interests of shareholders and profit. I think it’s important to understand where the breakdown is.”

Speaking in the same session, Cbus chairman, Steve Bracks said that there’s been a “significant shift” in trust following the GFC.

However, he argued that the Australian superannuation system is “treasured” and that the system stands out in the world as “one of the better examples of what you can achieve, so let’s not throw that out”.

“There’s millions of Australians who support it [superannuation] but we don’t demonstrate the benefits well enough, we don’t reinforce it well enough, we don’t explain, for example, what we invest in and have very readily achievable examples of the things around us in Australia that we already support and invest in.”

He acknowledged, however, that it is “tangible” when people “feel real material disadvantage” as a result of poor financial advice or being placed in non-performing products.