1. Before the royal commission started, what were your expectations of the outcomes?
We thought that all super funds and in particular, banks would be taken to task in terms of incidences of poor conduct and if appropriate, recommendations for penalties would apply to the executives and firms involved. We certainly were not expecting 70+ recommendations for ‘cleaning up the industry’ in one fell swoop.
It was known for many years before the commencement of the royal commission by those working within the financial services industry that banks were focused on profit over customer interests, and staff were trained to sell. I left my role working in a Big Four bank for that very reason. I was not prepared to have others invest in something I would not do myself. So, I expected that the sales and cross-selling practices of banks and other financial services businesses would be stopped. Staff working in those businesses were only ever as good as their last sale. The model was never sustainable.
I also expected that the ‘commission clipping’ and ‘high investment manager fees’ charged to customers, who trusted their bank, would be stopped and reasonable costs would be charged instead. And that diversity and accountability of the bank’s board be refreshed, along with stronger governance frameworks.
That they would be less controversial. No one expected the royal commission to uncover such poor governance and unethical practices in the financial services sector to the extent it did. I expected the outcomes might focus on improved transparency of financial products and enhanced portability of products between providers.
2. Did the actual experience match your expectations? If not, why? What was the experience really like?
No, it did not. Commissioner Hayne and the Crown focused on examples of conduct, which were unacceptable at a corporate, executive and trustee level and did not comply with various laws and regulatory guides. However, it seemed that industry funds and the composition of their boards (ie, not having a majority of independent directors) was not a concern. Likewise, key relationships with the industry funds and associations with IFSN and the legal ownership between these parties and unions were ignored. This is not taking anything away from the findings. It seemed that listed companies were a key and only focus of the commission.
The actual experience did not match expectations because I expected a lot more heads to roll (board members and other executives to be made accountable and punished). The royal commission became a circus that used examples of terrible stories of the past to highlight and at times, sensationalise the underlying issues of poor practices. Ultimately, the banks and others spent lots of money and time supplying and producing massive amounts of information. But within the industry, we all knew before the royal commission that the core of the problem was the bank’s business model (remunerate and give bonuses for selling bank products).
I was shocked. It validated consumers’ historic distrust for large financial service organisations such as banks and insurers. I was also shocked at the limpness of our regulatory authorities.
3. What are the three key lessons learnt from the experience? What would you have done differently?
- Practices in the past are not acceptable in today’s community expectations. This includes corporate culture and the focus of profits over the interests of the public. A conflicted remuneration model rewards for sales and doesn’t focus on customer satisfaction and maintenance.
- The ‘if not why, not litigate’ view by the Australian Securities and Investments Commission (ASIC) shows that every organisation is at legal risk, including anybody who sells one of the affected products — either at a front-line level or senior executive level.
- Paid commissions are conflicted and according to Hayne, must be banned in some cases. Likewise, charging a fee, but not providing a financial plan is unacceptable for ongoing client maintenance. The royal commission’s view is that a plan is the only way for a client to be given value for money, despite what a client wishes as a minimum standard.
- White-collar crime is still not enforced to the standard it should be to deter would-be perpetrators.
- All of the Big Four banks hold a privileged licence to operate (and make good returns as a result) so they should be held to a higher standard.
- The regulators are not effective in some areas of their supervision activities and are unable to wield the power they need to. This is also because the tools they have been given lack immediate impact. Most of the time enforceable undertakings are used. That is an easy out for a big business because a regulator pursuing through legal action faces a drawn-out process, cost pressures, unknown outcomes and the chance of a legal technical overturn that means the regulator loses despite having a case.
I would provide the regulators with tools (special legal powers) that allow for swift enforceable action.
- Poor corporate governance can occur in the largest and most well-funded of organisations.
- Culture and composition of board and executive teams in the financial services sector needs to change.
- I would have had a less pugnacious attitude to engagement with the royal commission, shown more contrition and engaged with consumers more.
- What do you believe will happen next?
I believe a wave of class actions will and have commenced against any parties who can be perceived as having done wrong retrospectively. Wrongly, interpreting Acts and laws post-GFC in a harsher way, and holding participants to that higher standard now (as opposed to what ASIC considered acceptable until this point) is the norm. Banks have largely been slapped on the fingers with the initial scope of what the commission has been tasked to do. Brokers, advisers and small participants have largely been made to pay for the bad behaviour of our largest corporate citizens.
The bank’s business models are already shifting for the better, and over time their cultures and governance will improve. The regulators will become tougher and the compliance bar will be raised. However, the compliance cost pendulum will probably swing too far which is not ideal from a cost and efficiency point of view.
More prescriptive regulation. Higher regulatory budgets and expenditure. There will be a short-term financial impact on the sector and more rotation of director and chairs.
Elsewhere, the royal commission’s findings were behind some of the reasons why 83 per cent of those polled for the Governance Institute’s Future of the governance professional report expected their roles to change by 2025
An evolving role
Elsewhere, the royal commission’s findings were behind some of the reasons why 83 per cent of those polled for the Governance Institute’s Future of the governance professional report expected their roles to change by 2025.
Participants in the report, released in August 2019, expected increased regulation and more reporting to third parties on non-financial metrics following the commission.
They believed that a lot more scrutiny would now be placed on how boards measure and influence organisational culture and that there would be an ever-growing focus on customers.
Where are we now?
The final report from Commissioner Kenneth Hayne made 76 recommendations, 54 of which were directed at the government, 12 to the regulators and ten to the industry.
Of the 54 recommendations directed to the government, over 40 required legislation. The government also announced a further 18 commitments to address issues raised by the commission. On 28 November, two bills were introduced into Parliament proposing to implement the government’s response to several banking royal commission recommendations.
Treasurer Josh Frydenberg expects more than 50 of the 54 commitments to have been implemented or be subject to legislation by the middle of next year.1
The government has already acted on 15 commitments, including a review of the Australian Prudential Regulation Authority (APRA), the Australian Prudential Regulation Authority Capability Review, released in June 2019.
Legislation to strengthen the accountability of superannuation funds has also been passed. This comprises eight recommendations that the commission’s report directed at the government and seven additional commitments initiated independently by the government as part of its response in February.
The government has also expanded the remit of the Australian Financial Complaints Authority by an additional four years back to 2008 to enable more consumers to have their cases heard and receive compensation for misconduct.
Plus, it will establish an independent review in three years to assess the extent to which changes in industry practices have led to improved consumer outcomes and the need for further reforms.
Changes at ASIC
In response to comments made by Hayne in his interim report, ASIC adopted the ‘Why Not Litigate?’ enforcement approach in October 2018 and has started taking legal action against various financial services organisations.
It plans a ‘litigation blitz’ with up to 50 matters going to court, many of them arising from the commission.2
Commissioner Hayne made 27 referrals involving 14 different institutions.
ASIC has established an Office of Enforcement to strengthen its enforcement culture and effectiveness. It is also accelerating its enforcement outcomes and will hire more analysts, investigators and lawyers to help it do so.
These moves are being funded by the $404 million the government will give ASIC over four years in response to the royal commission.
The Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019, passed in March this year, improves ASIC its ability to impose penalties and carry out its enforcement agenda.
Keeping APRA busy
APRA has also had its hands full. In November, it published plans to scale up significantly its efforts to lift standards of governance, culture, remuneration and accountability across the industries it regulates.
It aims to strengthen the resilience of financial institutions, including addressing, and ideally preventing, issues such as poor risk governance, misaligned incentives and misconduct.
In July 2019, the government released a Capability Review report examining APRA’s ability to meet its mandate into the future. It suggested that cultural change within APRA was necessary to build its capability and that APRA needed to lift its effort on superannuation and shift its thinking and focus.
In February, APRA indicated that of the 10 royal commission recommendations requiring its attention, nine would be completed by the end of 2020. Of those, four would be completed in 2019.
APRA will be helped by the extra funding of $151.7 million it received in the 2019/20 Budget.
Following the release of the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia (CBA) in May 2018, APRA wrote to the boards of 36 of the country’s largest financial institutions asking them to examine they had the same weaknesses. Their self-assessments confirmed that many of the issues identified within CBA are not unique to that institution.
As a result, APRA increased the minimum capital requirements Australia and New Zealand Banking Group, National Australia Bank and Westpac by $500 million each. It had already applied a $1 billion capital add-on to CBA.
Indeed, APRA deputy chair John Lonsdale says: ‘Remediation costs relating to issues identified in the royal commission have cost industry in excess of $7 billion to date and are likely to rise further as both new and historical issues come to light.’
Lifting the bar
Since the start of the royal commission, much work has also been done to improve codes of practices in financial services. Moves include:
- A new Banking Code of Practice came into effect on 1 July 2019 and adopts recommendations from the royal commission.
- A new mandatory General Insurance Code of Practice is likely to start on 1 January 2020.
- An independent review of the Insurance Brokers Code of Practice is underway.
- The Financial Services Council is developing a new life insurance code of conduct.
- The Financial Adviser Standards and Ethics Authority’s code of ethics comes into effect on 1 January 2020.