The final report from the Royal Commission was released at 4.10pm on 4 February. Prior to its release, industry observers were referring to it as the ‘spanking report’, presuming that it would seek to punish financial services companies that had broken the rules. After its publication, Allan Fels, former chairman of the Australian Competition and Consumer Commission, publicly called the report a ‘damp squib’.
The final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry finally arrived and was not the immediate hit that its authors might have hoped for.
While the Australian economy did not nose-dive at the onset of the global financial crisis in 2008, badness and misdeeds were growing within the financial services realm. The 1,000-page Royal Commission report catalogues some of this badness – and some criminal prosecutions of CEOs might still happen.
It now falls to the Australian government to implement the recommendations of the report. However, it is also widely expected that there will be a general election in May of this year which could have an impact on such implementation.
Highly regulated nation
The financial services sector in Australia is one of the most highly regulated in the world – with the Australian Competition and Consumer Commission (ACCC), Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) – but the report concluded that it was not the rules and regulations in place that were themselves at fault. The failings fall squarely in the shoulders of those who were meant to enforce the rules.
The remedy to the lack of oversight is to add a further layer of regulation – a ‘super regulator’ who will sit above APRA and ASIC and make sure they do their job properly this time.
Avoiding a cliff edge
The report seems carefully structured to ensure that the general public do not lose complete faith in crooked banks and insurance companies and cause a credit crunch – but calls instead for better enforcement of existing regulations.
For instance, the report recommends disallowing banks from paying commissions to mortgage brokers and proposes that consumers should pay the brokers instead.
There were some fans of the report. S&P said, “We expect the recommendations to strengthen Australian financial institutions’ risk culture. The Royal Commission has highlighted a range of cultural and behavioural matters across the financial system. Changes implemented by the banks and insurers as a consequence - whether by themselves or due to the recommendations - should strengthen the risk culture.”
The ratings agency goes on to say, “the insurance industry is well advanced in improving sales practices such as cold calls and add-on policies. Future financial sector policies should have reasonable certainty given that the Royal Commission’s 76 recommendations appear to have broad bipartisan support. However, the implementation of these recommendations could be nuanced, particularly on mortgage broking or distribution of life insurance.”
Where to from here?
The likelihood of prosecutions look high. ASIC is urged to consider court action as a starting point to tackle misconduct in financial services. It seems likely that the fees-for-no-service scandals, unveiled during its inquiry, could lead to criminal charges.
Author of the report, commissioner Kenneth Hayne, said, “In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit, but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place.
“Too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished.’’
Doing things differently
In future, in Australia, financial advice faces an overhaul, with fee arrangements renewed annually by the client. There will also be tighter disclosure around independence and another review, to be completed by the end of 2022, of the effectiveness of the new measures.
The superannuation industry also faces new challenges. The commission recommended a person should only have one default account, reducing around 10m unintended multiple accounts that attract unnecessary fees. The hawking of superannuation and insurance products will be banned.
The government will set up a compensation system of last resort to ensure that consumer complaints are heard and that any compensation is paid.
Remuneration
The report identified salary and incentive structures as the root cause of much of the trouble.
“Rewarding misconduct is wrong,’’ Mr Hayne said. “Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards.’’
He recommended APRA “increase the intensity’’ of its supervision of pay structures, taking into account misconduct, compliance and other non-financial risk.
Specific recommendations
Some of the main recommendations relating to insurance, superannuation and financial advice include:
Insurance
- Heavy-handed selling of insurance products should be banned
- Funeral expense insurance policies should be defined as a financial product, bringing it under the oversight of ASIC
- Impose a cap on the commission that can be paid to car sellers for add-on insurance products
- Handling and settlement of insurance claims would be defined as a financial service
Financial advice
- Create a new disciplinary system for financial advisers, with all advisers required to be registered. A single disciplinary body should oversee the system
- Grandfathered provisions of conflicted remuneration should be repealed as soon as possible
- The current cap on commissions for life risk-insurance products should be reduced and ultimately set at zero
- All remaining conflicted remuneration exemptions should be referred with a view to banning them outright
- All banking licence holders be required to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis
Superannuation
- A single default super fund for all workers. Individuals should be ‘stapled’ to a single default account
- • Ban on advice fees deducted from MySuper accounts
- • Advice fees for non-MySuper accounts would be prohibited in most cases
- • Heavy-handed selling of superannuation to be abolished
Regulators
- The report also made the following recommendations regarding regulators:
- Retain ASIC and APRA but have them overseen by a new independent authority that would assess the two regulators to ensure they are carrying out their responsibilities
- ASIC overhauls its approach to enforcement, with a focus on court action rather than infringement notices
- ASIC should continue its annual reporting of breaches of financial service regulations but in future name the companies rather than just the type of breach
For those hurt by the finance sector
- There should be a change to the way community legal groups helping those with financial complaints are funded, moving it to a more ‘predictable and stable’ system
- Compensation scheme of last resort for those unable to receive financial recompense from their institution.
The Royal Commission made 24 referrals of misconduct by financial firms to the regulators for potential further action. A