Reporting bad news allows a company to draw a line under the bad news, and in a sense, start again.

But this won't happen with Westpac's revelation of a 22 per cent fall in net profit and its putting aside A$1.4 billion ($1.5 billion) for customer compensation and remediation for poor service. Investors hoping the confessions will allow the bank to put the fallout from last year's Banking Royal Commission behind it are very much mistaken.

As Westpac unveiled a A$3.3 billion half-year net profit, a couple of blocks away in Sydney the Federal Court heard allegations the bank breached responsible lending laws more than a quarter of a million times in the past three years.

Lawyers for the Australian Securities and Investments Commission alleged Westpac failed to properly verify the actual financial position of borrowers 261,987 times.

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In 154,351 of those cases, the bank also failed to use correct figures when assessing whether borrowers taking out interest-only loans could still afford to meet repayments when honeymoon periods ended and payments increased, the lawyers said.

Westpac is contesting the action, arguing in court that it acted in "good faith" to meet its responsible lending obligations and that it relied on benchmarks to assess borrowers' capacity.

The action signals a tougher stance by regulators who, in the past, were happy to come to a cosy arrangement with the banks and other corporates, whereby ASIC was able to chalk up a success and the miscreant companies agreed to pay a fine and undertook not to do it again, meanwhile continuing largely as it had before.

In fact in relation to the current case, late last year ASIC and Westpac had agreed that Westpac would pay a fine of A$35 million for breaching responsible lending rules – although in fewer instances than ASIC is now alleging – and it was only after the Federal Court refused to rubber stamp the deal that ASIC started its court prosecution.

But the Royal Commission changed that. As evidence of the banks' shoddy treatment of customers mounted, observers asked – Where were the regulators?

Suitably chastised, ASIC and the Australian Prudential Regulation Authority will now ask themselves, why not prosecute? rather than, Let's settle.

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Between them the big four banks have spent the A$4.8 billion over the past 18 months repaying customers for negligent and, in some cases, dishonest service. The additional cash they are putting aside would allow them to draw a line under the Royal Commission.

In reality, the banks don't know how large their compensation bills will be, particularly for the fees-for-no-service scandals that engulfed their wealth management arms.

A big issue is that the banks haven't kept adequate records, and where there is doubt, the customer will receive a refund. (In the Royal Commission, Commissioner Kenneth Hayne joked that the only part of the banks' record keeping that performed adequately was the part responsible for collecting fees from customers.)

The compensation bill is one of the factors that saw the banks report slowing profits in their latest earnings results over the past couple of weeks, according to calculations by EY.

As with Westpac, the fallout from the banking Royal Commission will continue to dog ANZ, the National Australia Bank and the Commonwealth Bank of Australia.

The banks are operating against the backdrop of tough economic conditions, which is translating into a reluctance to borrow.

Householders have seen the values of their properties fall by between 10 and 20 per cent and so are reluctant to add to their debt.

Business, meanwhile, don't want to borrow while consumer spending is weak – another consequence falling house prices – and ahead of the likelihood that Labor's Bill Shorten will emerge as Prime Minister after Saturday's federal election.

Westpac Australia took a big hit at the Royal Banking Commission. Photo/Getty Images.
Westpac Australia took a big hit at the Royal Banking Commission. Photo/Getty Images.

Shorten could be considered to be the most left-leaning alternative prime minister in decades, and if he wins will tip the balance of power back in favour of the trade union movement and increase taxation for many businesses and the well-off.

Westpac is trying to strip hundreds of millions of dollars of costs out of the business, but this can only bolster profits in the short-term and won't lead to growth.

In the past, the banks might have been able to rely on customer trust – while most Australians don't like banks, they strongly believed banks were the safest place to keep their money.

Revelations from the Royal Commission that banks were takings fees for no service, charging dead customers, and taking advantage of the vulnerable has changed that. The banks can no longer rely on customer loyalty.

For the past couple of decades, bank stocks have been a portfolio staple for Australian investors, who could be security in the knowledge that their earnings would continue to grow, along with the share price and their dividends.

Those days now look to be long gone.