By Swati Pandey and Matt Siegel


SYDNEY (Reuters) - Australia announced a limited inquiry into bank misconduct on Wednesday although a motion for a more sweeping investigation into the scandal-ridden financial system was narrowly defeated by the government in parliament.


The latest inquiry targeting mistreatment of small business customers is the government's fourth measure this year to alleviate public concerns about the power of the big banks, following a series of revelations about misconduct.


But the conservative Liberal-led coalition used its one-seat majority in parliament to defeat an opposition motion for a far more powerful Royal Commission into the sector, which could have seen bank executives forced to testify.


"A Royal Commission would send a signal internationally that there are structural problems with our banking and financial system which would have significant repercussions for confidence, international investment and for our AAA credit rating," Liberal MP George Christensen told parliament.


Australia's four major banks - Commonwealth Bank of Australia <CBA.AX>, Westpac Banking Corp <WBC.AX>, ANZ Banking Group <ANZ.AX> and National Australia Bank <NAB.AX> - control 80 percent of the country's lending market and have posted record profits for years.

But they have come under fire for abuse of market power following a series of scams involving misleading financial advice, insurance fraud and interest-rate rigging, as well as for refusing to pass on official interest rate cuts in full.

Opposition Labor Party leader Bill Shorten, moving the motion for a Royal Commission in parliament, said it was the only mechanism with the coercive powers and jurisdiction to deal with systemic bank misconduct.

"Australians are sick and tired of the scandals being investigated after the harm is done," he said, accusing Prime Minister Malcolm Turnbull and his government of "running a protection racket" for the big banks.

The most powerful investigative body in Australia, Royal Commissions can recommend prosecutions and have been held in recent years to expose institutional child sexual abuse and corruption in the building trades.


The Australian Bankers Association said self-regulation and existing government oversight were enough to prevent what it calls isolated cases of wrongdoing.

Australian banks in April promised unprecedented reforms to protect consumers and boost transparency, including reviewing sales commissions, supporting whistle-blowers and black-listing individuals for poor conduct.

The government has also moved to head off a Royal Commission by beefing up the corporate watchdog's powers, ordering bank chiefs to make annual appearances before parliament's economics committee and promising a tribunal to examine citizens' complaints.

Its latest step - an inquiry by the Australian Small Business and Family Enterprise Ombudsman - was enough for wavering Liberal MPs like Christensen, who had threatened to vote with Labor for a Royal Commission, to instead vote against the opposition motion on Wednesday.

The ombudsman would make recommendations on further regulatory action to prevent small businesses being abused, following cases identified by an earlier parliamentary committee.

"The committee raised serious concerns about how banks treated some of their small business lending customers and made a number of recommendations to address the deficiencies," Small Business Minister Michael McCormack said in a statement.

While banks will breathe a sigh of relief at the opposition's defeat on Wednesday, another scandal could be enough to revive calls for a Royal Commission and test the government's one-seat majority.

(Reporting by Swati Pandey and Matt Siegel; Editing by Stephen Coates)