The long-awaited final report from the banking Royal Commission has been handed down. The report, received by the Morrison Government on Friday 1 February and released publicly Monday 4 February, has suggested sweeping changes to the industry and 76 actionable recommendations.
Commissioner Kenneth Hayne’s final 530-page report and 76 recommendations have been welcomed by the Federal Government and Labor, who say they will waste no time in implementing the changes.
The report skewers the reward culture of the banking industry, with Mr Hayne calling both the fee-for-no-service model and the incentive, bonus and commission schemes into question.
“Rewards have been paid regardless of whether the person rewarded should have done what they did,” said the report, saying that “sales became all important” and “providing a service to customers was relegated to second place”.
Another key area the report focused on was the ‘imbalance of power’ between consumers and those offering services in the banking space. It says that those in power acted the way they did ‘because they could’.
The report goes on to say that consumers were lulled into a false sense of security by intermediaries who seemed to act as a safeguard between consumers and the providers, but were in fact often being rewarded or paid by the providers. This section of the report focused on mortgage brokers, the intermediaries who were not seeking the best outcome for the clients, but just one that was ‘good enough’.
Finally, Mr Hayne brought the axe down on the entire industry, addressing the lack of consequences for wrongdoing and the lack of accountability. “Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened,” said Mr Hayne.
Aside from these key focuses, the report addresses specific issues in many aspects of the banking industry, from insurance products to superannuation.
Fees for no service
Regarding the troubling fees-for-no-service scandal, the report recommends financial watchdogs consider criminal charges against the organisations involved, which are currently unnamed.
During the Royal Commission, reports were heard of customers being charged for services they had never received, and being charged fees even after they had died.
The report estimated the cost to wealth managers and the major banks would be $850 million in compensation.
The final report recommended the industry move away from a commission-based model to a fee-based one. Mr Hayne went on to say home loan customers should pay the fee, not banks.
The current model sees brokers receive upfront and trailing commissions from banks and lenders. This speaks to the concerns addressed in the report that intermediaries are not entirely unbiased in their recommendation of products.
The size of a broker’s commission can be seen as an incentive to recommend certain products from lenders or banks which may not suit a consumer’s needs.
Mr Hayne recommended a “steady but deliberate” move from the existing model to a model where a borrower pays a fee instead. The Government has supported the calls, saying it will ban trail commissions and other “inappropriate forms of lender-paid commissions” on new loans from July 2020.
The report also queried whether mortgage brokers should be considered different to other financial advisers.
“I consider that, 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,” said the report.
ASIC will become the primary conduct regulator overseeing superannuation and APRA will receive extra power for breaches of laws. The recommendation has been made that deductions of advice fees should be prohibited from a MySuper account.
The report also suggested that people should be ‘stapled’ to a single default superannuation account. The current system sees workers who change jobs frequently often given a new account each time, which results in them being hit with fees on a continuing basis.
APRA and ASIC also came under fire in the report for their lack of action in the past. An independently chaired regulator-oversight body will be created, tasked with holding the regulators accountable. It will report twice a year to the Minister on performance.
There will be regular reviews of APRA and ASIC in three years’ time, when an independent inquiry will investigate how regulator behaviour has changed since the Royal Commission. Mr Hayne went on to say that, although he has not recommended another body take over ASIC’s duties, he did consider it.
“Although I do not now recommend the establishment of a specialist civil enforcement agency, ASIC’s progress in reforming its enforcement function should be closely monitored,” said Mr Hayne.
“If, over the coming years, it becomes apparent that ASIC is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability, further consideration should be given to developing a specialist agency of the type I have described.”
In the days since the report has been released, there have been responses from several key members involved. Malcolm Turnbull was Prime Minister and Scott Morrison was Treasurer when the Royal Commission was being requested, and they both delayed the procedures by over a year. In the wake of the final report, Mr Turnbull has said this is something he regrets.
Speaking to the press, Mr Turnbull said “I think we should have got on with it earlier”, but claims the compensation scheme for bank customers which he and Mr Morrison were working on for a time was the reason for the delay.
“I could see that the problem was a failure of responsibility and trust, and I wanted to get on with it and deal with it quickly,” he said.
“We were well advanced with a compensation scheme to deal with the victims of various bank malpractices, I suppose, is the best way to describe it. And that was put on hold when the Royal Commission was set up.
“So I expect that Scott Morrison will dust that off and get back out there.”
Current Treasurer Josh Frydenberg has come under fire for refusing to acknowledge the delay caused by the Government. While Mr Frydenberg has said he supports the outcomes of the report and that the Morrison Government will deliver on the recommendations, he has dodged a response to the claims that the Government was supporting the banks through pushing for a delay to the Commission.
“Well, we could debate for hours the failures when Labor was last in office,” said Mr Frydenberg.
“I recall Bill Shorten saying how fantastic the sector was when he was the Minister for the sector. But he didn’t call a Royal Commission or take action to bring these big banks to account. He didn’t put in place new standards, which we have announced today, and have been doing since the Financial System Inquiry was initiated by this Government when we first came to power in 2013.”
A statement from Labor has combatted these claims.
“Scott Morrison and the Liberals should be condemned for voting against the banking Royal Commission 26 times,” said the statement from Bill Shorten and Chris Bowen.
“The Liberals have shown they cannot be trusted to clean up the banks. They are too out of touch and only stand up for the top end of town.”
Mr Bowen went on to say it was a ‘dark day’ for Australia’s banks and financial institutions, saying they should ‘be above all, ethical’.
One of the biggest rebukes in the report was addressed to National Australia Bank chairman Dr Ken Henry and CEO Andrew Thorburn. Mr Hayne said, “Having heard from both the CEO Mr Thorburn, and the chair Dr Henry, 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.”
NAB has only released a statement saying they will review the report and provide further updates where appropriate. Mr Thorburn initially released his own video statement, a move which is being widely suggested was so he could avoid being questioned by the media – although he has since done media interviews, during which he was highly criticised for his failure to act and also his choice to take leave towards the end of the process.
“I and we embrace the ambition and the recommendations contained within the report,” Mr Thorburn said.
“But there is clearly more work to do for us at NAB. We are taking steps to earn your trust through action, and now we will need to work through this report and implement the recommendations.
“We want to earn your trust; we want to get better.”
ASIC and APRA both said they are currently reviewing the report and in the process of implementing changes based on the findings.
Commonwealth Bank CEO Matt Comyn has also said the bank is working through the report and notes the specific comments from Mr Hayne in regards to CBA products such as superannuation.
“We note that the Commissioner has concluded that a number of matters regarding the Group’s conduct, including in relation to superannuation, warrant further investigation by relevant regulators and we will co-operate fully with these investigations,” Mr Comyn said.
“As challenging as the Royal Commission process has been, CBA will be a better bank as a result.”
Mortgage Choice and other brokers have said the changes to the fee structure will be detrimental to both the industry and consumers, creating less competition and ultimately costing consumers more.
The biggest question mark after the release of the report is the lack of punishment. The interim report and the shocking revelations of fees with no service were expected to bring big consequences from Mr Hayne. But the report made no direct recommendations for criminal prosecutions against any entity or individual and only 24 cases of misconduct will be referred to the regulators.
The onus is now on those who were called out by the report and the Government to decide how far to take the recommendations and how much of the banking culture will need to be changed. Australia has already experienced some of the fallout from the Commission, with tighter lending conditions affecting many property buyers and creating delays across the country.
The full report can be found here.