In the firing line
The report refers 24 cases to regulators for civil and potentially criminal breaches of the law. The federal government says the referrals can apply to individuals as well as companies putting executives at AMP, ANZ, CBA, NAB, IOOF, Suncorp, TAL and Allianz on notice.
Financial services businesses adjacent to the banks such as insurance companies, mortgage brokers, financial advisers and super funds stand poised to have longstanding business models up-ended by the report, with reforms that have the potential to render uneconomic those operating at the margins.
The regulators, ASIC and APRA, will also face a new era with a greater delineation of powers and the establishment of a new oversight body, twice annual reviews and direct instructions to collaborate and share information.
Treasurer Josh Frydenberg said the government had committed to take action on all 76 recommendations contained in the final report, however the government will not introduce a blanket ban on trailing commissions for mortgage brokers because it fears it will impede competition.
“The government’s principal focus is on restoring trust in our financial system and delivering better consumer outcomes, while maintaining the flow of credit and continuing to promote competition” Mr Frydenberg said.
Shadow Treasurer Chris Bowen responded by saying the Labor government will implement the recommendations in full, including the phasing out of trailing commissions for mortgage brokers over two to three years. Mr Bowen also left open going beyond the royal commission recommendations and taking more measures to the election.
“We’ll have more to say … if at any point we feel there’s more to do,” he said.
Responding on behalf of the banking sector, Australian Banking Association CEO Anna Bligh pointed to the number of referrals as evidence no punches were pulled, saying the report contained “some very tough medicine”.
Westpac chief executive Brian Harzter said the royal commission had been a confronting but important process, adding that the bank had already moved away from grandfathered commissions for financial advice. “The recommendations in the report will help us build on this progress,” Mr Hartzer said.
In a statement, the Commonwealth Bank said it was aware the commissioner had referred the bank to ASIC for its failures to roll over 13,000 superannuation members into low-fee accounts and communicate with them honestly.
A spokesperson for the bank said it was aware the issue warranted “further investigation by relevant regulators and we will cooperate fully”.
Commissioner Hayne returned to the theme of greed in his three-volume final report, which he said drove almost every example of misconduct. He said banks allowed sales to become all important and conflicts of interest could not be managed and went unsupervised.
“Experience shows that conflicts between duty and interest can seldom be managed; self interest will almost always trump duty,” Commissioner Hayne said.
Commissioner Hayne stopped short of delivering a blue-print for how more than 100,000 bank employees should be paid, however instead recommending banks perform annual reviews of how front line staff are paid.
He gave the Banking Executive Accountability Regime (BEAR) a big tick, which is designed to better align the incentives for the highest paid executives with those of long-term shareholders while improving individual accountability for failures, and recommends it be extended to include all APRA regulated institutions and the regulators themselves, ASIC and APRA.
Commissioner Hayne does not waste any time with the low hanging fruit: he recommends an immediate end to grandfathered commissions for financial advisers, annual reviews of ongoing financial advice fees to be agreed by customers and a new disciplinary system for financial advisers.
“The time for transition has passed,” Commissioner Hayne says, effectively ordering the reinstatement of the first FOFA reforms in their original state.
The commonsense recommendations continue with Commissioner Hayne calling for an end to the blight of door-to-door funeral expense policy sales, point of sale exemptions for motor finance and the charging of dishonour fees on basic transaction accounts held by the disadvantaged.
On the issue of responsible lending, which many feared could place further pressure on an already weakening housing market, Commissioner Hayne delivered an unexpectedly light touch with a series of practical recommendations.
Hayne’s first recommendation is that the law should be amended to ensure mortgage brokers act in the best interests of the borrower, that ASIC approve codes of conduct for credit providers and make elements of the code enforceable by law.
Commissioner Hayne says agricultural businesses should not be charged default interest in the case of a national emergency or floods and a national farm debt mediation scheme needed to be established immediately.
He also recommended the threshold for small business be raised to include any business with fewer than 100 full-time employees and a loan of less than $5 million. The definition is important because the Code of Conduct prevents banks from unilaterally changing the terms of a contract if they are a small business. The Australian Banking Association believes $3 million is appropriate because it captures the vast majority of businesses however an independent review commissioned by the ABA recommended $5 million.
Wealth management and financial advice has emerged as a key target of Commissioner Hayne’s quest for reform, who was demonstrably aghast at many of the responses from the banks in relation to their financial advice arms.
He recommends that all AFSL holders be required to report serious compliance concerns on a quarterly basis, that all financial advisers be registered and the establishment of a single disciplinary body.
In superannuation, Commissioner Hayne says the charging of advice fees to low-balance superannuation accounts should be prohibited. Charges to any other form of superannuation fund should be capped and require specific approval. The unsolicited sale of superannuation products would also be banned, Commissioner Hayne said there was no excuse for multiple superannuation accounts and recommended that there should only ever be one account for each Australian worker.
The insurance sector is one of the hardest hit by Commissioner Hayne’s recommendations. It will lose several carve-outs it lobbied hard for, including its exclusion from unfair contract protections, and an exemption that meant the handling of claims was not considered to be a financial service. The industry will also be pushed to make its industry codes of conduct, and the sanctions under those codes, much tougher.