By Byron Kaye
SYDNEY (Reuters) - Australian bank shares surged the most in a decade on Tuesday after a long-awaited report on finance-sector misconduct recommended dozens of rule changes but spared the "Big Four" lenders any serious threat to their market dominance.
In a report released by the government on Monday, the retired judge who led a public inquiry into financial-sector misconduct last year referred 24 cases to regulators for possible prosecution.
But the inquiry's broader list of 76 recommendations on how to end greed and systemic malpractice stopped short of calling for enforced divestments, cuts to executive pay or tighter lending rules, leaving the banks largely unscathed.
"It is possible that the banks may face criminal proceedings but we do not believe that any of the 76 recommendations by themselves will have a material financial impact," UBS analysts said in a research note.
Citi analysts said it was the "best possible set of recommendations given the circumstances that the sector could have reasonably expected", while Moody's ratings agency said it was "unlikely to alter the favorable structure of the banking industry".
Bank shares soared in morning trade, driving the Australian financials index to its biggest intra-day rise since March 2009.
Commonwealth Bank of Australia and National Australia Bank Ltd jumped 4 percent, while Australia and New Zealand Banking Group Ltd and Westpac Banking Corp were up 7 percent by mid-afternoon.
Among the financial planners, which would have to disclose the commissions they receive for selling wealth management products under the report's recommendations, shares of AMP Ltd and rival IOOF Ltd both rose about 11 percent.
Mortgage brokers however were hit hard after the inquiry recommended banks should stop paying them trailing commissions - fees lasting the life of a product which were found to incentivize misspelling.
Shares of Mortgage Choice Ltd plunged 26 percent and those of Australian Finance Group Ltd fell 29 percent.
POTENTIAL CHARGES
While the inquiry known as a Royal Commission did not name names, its final report said the taking of fees for services not rendered was a potentially criminal breach of financial laws and recommended regulators determine if any charges should be laid.
Based on evidence presented to the inquiry, Commonwealth Bank, NAB and AMP are seen as the most exposed to possible criminal prosecution. All three companies have promised to crack down on such behavior.
AMP Chairman David Murray said the company was ready to assist authorities with any inquiries, adding in an interview with the Australian Broadcasting Corp that AMP was "under new management" following the departure of its CEO, chairwoman and several directors during the inquiry.
NAB CEO Andrew Thorburn cut short planned leave after Commissioner Kenneth Hayne's report accused him and NAB Chairman Ken Henry of being unwilling to accept responsibility for the bank's bad behavior.
Thorburn conceded mistakes had been made and said the report's criticism "does not reflect who I am or how I am leading". Henry said it was "not so" that he had been unwilling to accept criticism.
POLITICAL FALLOUT
The government has said it will "take action" on all 76 recommendations but it is unlikely to have time to get anything through parliament ahead an election expected in May.
The center-right Liberal-led government is behind the opposition Labor party in the polls, and Prime Minister Scott Morrison has been at pains to distance himself from his previous efforts while serving as treasurer to defend the banks and block an inquiry.
"I expressed last year my own regret as treasurer ... at some of the human factors that needed greater consideration in terms of calling the Royal Commission. But let's be frank, I called for the Royal Commission," he told reporters.
Shadow Treasurer Chris Bowen said Labor was committed to implementing all the commission's recommendations, telling the ABC it was a "report the government never wanted us to see".