BANKING ROYAL COMMISSION UPDATE
19 MARCH 2019
The report was handed down by Commissioner Hayne on 1st February 2019. Hayne is considered to be a stickler for process and punctuality, so it was no real surprise an extension wasn’t requested and all deadlines were met to the day.
The report contained 76 recommendations. Both sides of government have pledged action on all recommendations, which is not quite the same as agreeing to them all, but none the less a pretty strong response.
As an overall observation the report was not seen to be as tough as it could have been. Some commentators expected to see individuals named and shamed, even though this wasn’t really the purpose of the commission. Hayne has however made 24 referrals for misconduct to the regulators ASIC and APRA and a number of executives have been forced out of senior positions, including the Chairman and CEO of NAB.
I believe the devil is in the detail and the final ‘harshness’ of the report will come down to how the recommendations are implemented. There is plenty of scope to make a generational impact on financial services if the government so chooses.
A key complexity is who the government will be that implements the recommendations. Labor have been particularly critical of the sector and right now are odds on favourite to win the election. In the modern age it is of course not enough to just ‘win’, it has to be done with a sufficient majority in both houses to actually pass legislation. A few key issues that caught my attentions are discussed below.
A major conclusion has been that the Australian Securities and Investments Commission (ASIC) has not been doing their job in holding financial institutions to account. This is partly a cultural issue, including a reluctance to negotiate rather than prosecute, but also an inevitable situation after years of budget cuts. Expect to see a far better resourced organisation on a mission to prove a point.
Culture and pay
The word ‘greed’ featured strongly throughout the report and Commissioner Hayne puts most failings down to individuals putting their own interests before those of clients.
Banks have hidden behind the corporate finance theory that their sole job is to ‘serve the interests of shareholders’ (which means make as much money as possible), regardless of the impact on clients. This will no longer cut it.
Several AGMs at the end of 2018, including for the NAB, have seen unprecedented shareholder revolts against banker pay packages. It remains to be seen how this will change but bank executives are now all about reflecting on the Royal Commission as an ‘extremely difficult and confronting process’ and ‘regaining trust’.
This area was perhaps the biggest surprise however Hayne has been very consistent in trying to root out all forms of conflicted remuneration across the sector. Put simply Hayne does not see why mortgage brokers should collect an ongoing payment for the life of the loan when many (but not all) mortgage brokers do nothing for the client after the initial setup.
Secondly, he does not see why the initial fee charged should be a percentage of the loan, as this just encourages the broker to lend more. Once again implementation will be key on this one as right now 58% of mortgages come are originated by mortgage brokers and they are a key part of the economy. It is important that any changes don’t result in more money and business going back to the banks.
This analysis only covers a small part of Hayne’s report but it does show where he sees the issues in the industry. We will need to wait until after the election to see the full extent of changes.
On the financial planning side, and how it will affect Ambleside, we don’t expect major changes on the how we work with you and what we provide, however there will greater compliance and documentation required to show how we reach our recommendations.