The Australian Government has released its final recommendations following an independent inquiry of the banking and financial sectors, which revealed systemic wrongdoing.
National Bank of Australia, ANZ, Commonwealth Bank, Westpac. Photo: 123RF
Commissioner Kenneth Hayne's final report was scathing of a sales culture that resulted in poor customer outcomes, and recommended dramatic changes to the payment of mortgage brokers and financial planners that would see many leave the industry, as well as a major overhaul of insurance sales practices, especially for funeral cover.
The commissioner also referred several institutions to the corporate regulator for possible criminal charges around the "fees for no service" scandal, but declined to name names of individuals or companies that might face prosecution.
"Providing a service to customers was relegated to second place. Sales became all important," the commissioner lamented.
"Rewarding misconduct is wrong. 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."
In the government's initial response to the commission's final report, Treasurer Josh Frydenberg said it was taking action on all 76 recommendations, "and in a number of important areas is going further".
"My message to the financial sector is that misconduct must end and the interests of consumers must now come first," he said.
"From today, the sector must change, and change forever."
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With 76 recommendations made in total, here's the breakdown of the areas where those were made:
- Banking - 17 recommendations
- Financial Advice - 10 recommendations
- Superannuation - 9 recommendations
- Insurance - 15 recommendations
- Culture, Governance and Remuneration - 7 recommendations
- Regulators - 14 recommendations
- Other important steps - 4 recommendations
Criminal charges possible but not detailed in report
Mr Hayne noted the regulator appeared not to have considered criminal action until the topic was raised by him during the questioning of Nicole Smith from National Australia Bank's super trustee, NULIS.
"I invited ASIC [Australian Securities and Investments Commission] to consider whether criminal or other legal proceedings should be instituted in respect of that conduct," Mr Hayne wrote in the final report.
"Examination of these issues by ASIC is still continuing, and it would not be right for me to anticipate the outcome of those deliberations."
While maintaining the twin peaks model of financial regulation, Mr Hayne has urged a clearer division between Australian Prudential Regulation Authority (APRA) as the regulator responsible for ensuring financial stability and ASIC as the regulator primarily tasked with taking enforcement action when financial institutions breach laws.
Both regulators would also be subject to oversight from a new body that would report at least twice a year to the minister on the performances of APRA and ASIC.
Mr Hayne had a dig at ASIC and urged the regulator to seriously consider court action, leaving infringement notices for administrative breaches, particularly when dealing with large corporations.
"Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished," he concluded.
"Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation.
"And wrongdoing is not denounced by issuing a media release."
Mr Hayne also called for industry codes of conduct to be made mandatory in many instances and for key provisions to become legally enforceable.
Mortgage brokers face business-threatening commission overhaul
A key area for change is conflicted remuneration - that is where financial professionals are paid commissions for selling clients products, even though they may not be in the clients' best interests.
To that end, Mr Hayne recommended first a ban on trailing commissions to mortgage brokers.
Next, he wants a ban on banks paying any commissions to brokers, as well as an obligation for brokers to act in their clients' best interests, to be rolled out within two to three years.
But with more than half of all home loans now written through brokers and many smaller financial institutions relying on them for almost all their loan origination, the government has adopted a watered-down version of this recommendation.
While it proposed brokers be subject to a best-interests duty and for trailing commissions and "other inappropriate forms of lender paid commissions" to be banned from 1 July, 2020, it is planning for a review in 2023 about whether upfront commissions should be removed and brokers moved to a "borrower pays" system.
Financial planners in Hayne's firing line
In financial planning, Mr Hayne recommended planners must seek an annual renewal of all ongoing fee arrangements, where clients are sent a list of the services they should be provided and must agree in writing to pay the fee.
This is a key recommendation to avoid a repeat of the fee-for-no-service scandal, where clients, including some who were dead, were charged fees for financial advice that was never provided.
Mr Hayne also targeted the remaining commissions received by financial planners that were not already outlawed by the Future of Financial Advice (FOFA) laws in 2013.
The commissioner concluded that grandfathered commissions allowed by FOFA should be repealed "as soon as is reasonably practicable".
The government said it would end grandfathered commissions, effective from 1 January, 2021.
Additionally, Mr Hayne recommended life insurance commissions should be reduced to zero, unless ASIC identifies a good reason for retaining them.
ASIC should also consider whether commissions are justifiable for the sale of general and credit-protection insurance.
However, while the government supports ASIC's review into insurance commissions, it has not expressed a view that these commissions should be removed.
The insurance sector is facing the prospect of further restrictions to its sales practices, with Mr Hayne proposing anti-hawking laws be extended to the sector.
Under particular threat are funeral insurers, with the commissioner recommending they be regulated as a financial product.
That would undermine many of the business models in the sector, particularly those that target vulnerable groups such as regional and remote Aboriginal and Torres Strait Islander communities.
More to come.
-ABC
