The Final Report of the Royal Commission will not force radical changes to the financial services landscape, such as separating wealth and insurance from banks or merging regulators, but it does include many recommendations with wide-ranging implications.
Commissioner Kenneth Hayne started his Report by saying financial institutions and their staff focus too much on the pursuit of profit and personal gain:
"Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers."
The Final Report makes 76 recommendations, and both the Government and Opposition have already promised to 'take action' to implement all of them, with one exception. The Treasurer said the Government would not immediately accept the ban on upfront commissions paid by banks to mortgage brokers, due to competitive implications.
Here are some highlights of Hayne's recommendation:
Mortgage brokers and best interests duty
The law should be amended to provide that mortgage brokers must act in the best interests of the intending borrower. The obligation should carry a civil penalty provision.
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Financial advice ongoing fees
The law should be amended to provide that ongoing fee arrangements:
- must be renewed annually by the client
- must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged
- may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority
Financial adviser disclosure of lack of independence
The law should be amended to require that a financial adviser who would contravene the Corporations Act by assuming or using any of the restricted words or expressions including ‘independent’, ‘impartial’ and ‘unbiased’ must, before providing personal advice to a retail client, give to the client a written statement explaining simply and concisely why the adviser is not independent, impartial and unbiased.
Grandfathered commissions
Grandfathered provisions for conflicted remuneration should be repealed as soon as practicable.
The Government subsequently announced this would be implemented from 1 January 2021. Many financial planners who borrowed money to buy trail commissions books have two years to adjust their businesses to a loss of this revenue.
Hayne added:
"the time when the initial advice was given and the initial conflict arose has passed. The influence of the commission has already done its work once. But the problem remains. The influence continues. Advisers have an incentive to keep their clients in products with grandfathered commissions rather than advise them to move to better products. There can be, and is, no justification for maintaining the grandfathering provisions."
Superannuation trustee obligations
The trustee of an RSE (Registrable Superannuation Entity) should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.
Fees on MySuper accounts
Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited.
Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority (as above) are met.
No hawking of super products
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme.
One super default fund
Consistent with the Productivity Commission's proposal, it's recommended that a person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account.
Retention of 'twin peaks' regulation and superannuation
The ‘twin peaks’ model of financial regulation should be retained (that is, separation of APRA and ASIC).
The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that:
- APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system; and
- as the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers.
A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. Graeme Samuel has already been appointed to run this function.
Other details
The Report makes 24 referrals of institutions for misconduct which may involve civil or criminal proceedings, but contrary to expectation, it does not name any individual. The only major bank to escape mention is Westpac. Regulators need to decide the next steps, including the potential for criminal charges. Hayne says regulators have failed to prosecute when given an opportunity:
“Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them. Too often, financial services entities that broke the law were not properly held to account.”
He draws attention to sales techniques in branches, saying:
“That is why the attempts by ANZ and CBA to sell superannuation in bank branches under a ‘general advice’ model may have contravened the law.”
Concluding comments
Kenneth Hayne has passed the baton to legislators and regulators to act on his recommendations, including enforcing existing laws and giving far greater priority to customer needs over profits.
One of the fears behind the impact of the Royal Commission is the reduction in lending by banks to all sectors of the economy, especially small business. There is no news in the Final report to suggest it will become worse than it already is, and Treasurer Josh Frydenberg said,
“Let me be clear. Personal responsibility for financial decisions rests with those who make them. However those who suffer harm as a result of misconduct will have access to redress.”
If looking for the most damning criticism of any company or people, it is probably NAB's Ken Henry and Andrew Thorburn who appear most exposed. Hayne said of them,
“I am not as confident as I would wish to be that the lessons of the past have been learned ... Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains.”
Like the consequences for the entire report, the real improvements to the financial system after a year of unprecedented scrutiny, are ahead of us.
Graham Hand is Managing Editor of Cuffelinks.