Hayne's final report in-depth
In case your talking points aren't ready...
In what Treasurer Josh Frydenberg has called a “scathing assessment”, Commissioner Hayne has systematically ripped apart the banking, superannuation and financial services industry in his final report, delivered this afternoon.
Labor – long term banking sector critics – said the final report of the banking royal commission uncovered “unconscionable, corrupt and potentially criminal behaviour”.
Hayne reiterated the underlying six principles he identified in his interim report, that the banking and financial services industry should obey the law, not mislead or deceive and act fairly, provide services that are fit for purpose, deliver services with reasonable care and skill, and when acting for another, act in the best interests of that other. Pretty basic things to expect of the people looking after our money.
Here’s the lowdown, segment by segment. Plus, which sectors will be hit hardest, the stats that matter, and the history of banking reviews you may have forgotten, but Commissioner Hayne didn’t. 😱
— Alex
Banks
Treasurer Josh Frydenberg fully accepted 75 of 76 recommendations, refusing to commit to a proposal (recommendation 1.3) that borrowers pay the fees of mortgage brokers, saying previous financial inquires such as the Murray Inquiry in 2014 and the Sedgwick review in 2017 had recommended against such a move, arguing it would reduce competition between lenders.
Hayne also suggested axing trailing commissions for mortgage brokers, which the government has accepted, but which industry has warned will drive up the price of advice and loans.
In what seems like the bare minimum of acceptability, mortgage brokers will now be required to “act in the best interests of the intending borrower” – simple stuff with a big impact. Hayne suggests the obligation for this goodwill should be a civil penalty provision.
Hayne said commissions to financial planners that were supposed to be abolished under industry reforms five years ago, should finally be done away with.
Hayne has recommended criminal charges that carry a maximum fine of A$94.5 million against two institutions — but has not named them in his final report today, though speculation is rife that he means the most badly behaved of the bunch, NAB and AMP.
Hayne’s report identified NAB’s conduct as standing “apart from the other three major banks" and issued a swift dressing down to its chief executive Andrew Thorburn and chairman Ken Henry over the bank’s misconduct.
"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," Commissioner Hayne said.
There are 19 other breaches of law by the Commonwealth Bank, ANZ, NAB, ANZ, AMP and IOOF which Hayne has recommended for further investigation.
Financial Services
Hayne remarks that greed got the best of the financial services industry, leading to an environment where “rewards were paid regardless of whether the person rewarded should have done what they did”.
He recommended creating a new disciplinary system for financial advisers and suggested all advisers be required to be registered and overseen by one regulatory body the system.
Commissioner Hayne made clear:
“there can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities”.
"The financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again," he wrote in the report.
Part of the problem, Hayne identified, was that consumers often dealt with a financial services entity through an intermediary, meaning they were unsure who they were dealing with, making it hard to track accountability and understand the vertical integration of the advice they were receiving.
Hayne demands that ongoing financial advice fees be banned unless the client agrees each year to the fees.
His recommendations included that grandfathered provisions of conflicted remuneration should be repealed as soon as possible and the current cap on commissions for life risk insurance products should be reduced and eventually set at zero.
Individual financial advisers should be required to report "serious compliance concerns" to corporate regulator ASIC on a quarterly basis.
For those for whom it’s too late, Hayne suggests a last resort compensation scheme for customers who didn’t receive reparations from their institution. This is expected to offer 300 consumers a share of compensation totalling about A$30 million.
But after all the fuss about vertical integration being the source of all evil, and now that Commonwealth Bank, ANZ and NAB have sold off their wealth management divisions, and Westpac clinging on but suffering the lows of reputational damage, vertical integration has survived Hayne’s financial services lashing.
Insurance
Hayne’s report sets out a series of reforms to consumer insurance products, particularly sales practices, funeral insurance, life insurance and the general fairness of contracts.
Under his recommendations, the handling and settlement of insurance claims would no longer be excluded from the definition of “financial service”.
The recommendations would broadly prohibit the “hawking” of insurance and called for a Treasury-led working group to develop an industry-wide deferred sales model – which requires insurers to give consumers a cooling off period before attempting to sell insurance on consumer products – for the sale of any add-on insurance products, excluding comprehensive motor insurance.
It also called on ASIC to impose a cap on the amount of commissions that may be paid to vehicle dealers in relation to the sale of add-on insurance products.
The report recommends extending the definition of a “financial product” to cover funeral expenses, and “put beyond doubt” that the consumer protection provisions of the ASIC Act apply in full to funeral expenses policies.
The recommendations would impose a duty of utmost good faith in contract terms and provisions.
The report insists insurers should only be able to avoid paying life insurance in cases where the customer has engaged in “non-disclosure or misrepresentation”. However, the insurer is required to prove it would not have entered into a contract in the first place. For example, if a customer lied about an existing medical condition (non-disclosure) or lifestyle practices such as heavy smoking (misrepresentation) this would constitute grounds to refuse payment of life insurance.
Hayne recommends the law be amended to provide for enforceable provisions of industry codes, which should be made mandatory.
Superannuation
Commissioner Hayne’s decision not to recommend the structural separation of the banks will be bittersweet for the majors already well down the path of spinning off their wealth management arms. Westpac now has more time to work out if BT can be made to pay off in the post-Hayne environment.
That environment is likely to see further consolidation following Hayne’s recommendation that people only have one default super account, the prohibition of advice fees being taken from MySuper accounts, and greater regulatory scrutiny on whether trustees are actually putting the interests of members first. Unsolicited selling of super products will also be banned, and the Banking Executive Accountability Regime will apply to those working inside superannuation companies.
Hayne stops short of supporting any move to stop the for-profit super sector, arguing it would remove competitive forces at play in the market and insulate existing not-for-profit players from competitive pressures.
The Commissioner also stops short of banning ongoing advice fees on superannuation accounts, despite arguing there seems little evidence of the need for such advice. Where fees are ongoing, he recommends they be reviewed at least annually, and with the express written authority of the client. Reforms are already before parliament to cap fees on low balance super accounts and ban all super fund exit fees.
On the often-controversial issues of superannuation board governance, Commissioner Hayne calls for ongoing board renewal, with term limits more comprehensively applied. He doesn’t favour any new legislation or other prescriptive rules, arguing such a move would distract attention from the basic requirement of ensuring the board is collectively skilled and efficient.
Hayne says attempts by ANZ and CBA to sell superannuation in bank branches under a “general advice” model may have contravened the law. Despite some submissions to the contrary, Hayne says he doesn’t accept that the unsolicited offer of a superannuation product is in the interests of consumers, and he wants hawking of super banned.
Given many employees fail to make informed choices about their super, Hayne recommends default super accounts be carried over, or “stapled”, to members as they move jobs, as previously recommended by the Productivity Commission. All that wining and dining of large employers by super funds should come to an end recommends Hayne, ensuring decisions about default funds are not swayed for the wrong reasons. This would require a law change, with civil penalties to be enforced by ASIC.
The compulsory nature of super presents particular regulatory issues, says Hayne, with a focus on member outcomes. But he says creating a new and separate regulatory authority is likely to create more problems than it would solve, and instead recommends the roles of APRA and ASIC be adjusted, with ASIC to become the primary conduct regulator overseeing super.
Governance
On the issues of culture: “what people do when no-one is watching”, and governance: “the processes by which an entity is run”, Hayne wants every institution to have a long hard look at itself. But he’s also a fan of the Australian Banking Association-led Sedgwick review on remuneration, with its focus on removing solely sales-based incentives.
He also wants APRA to step up its guidance on remuneration, and recommends it shift its focus to non-financial risks.
Hayne recommends long-term variable remuneration be limited, and bank boards regularly assess the effectiveness of the remuneration system in reducing the risk of misconduct.
The Commissioner is out of step with David Murray’s view that you can’t regulate culture, calling on APRA to be given the resources to step up its risk culture programs. He also recommends the banks do their own bit to identify and fix any problems with culture and governance.
Commissioner Hayne singles out the boards of NAB and CBA as examples of governance gone wrong – boards not given enough information to act, and failing to give enough attention to non-financial risk. He goes further and points to NAB as standing apart from the other three major banks, in seemingly not having learnt the lessons of the past.
“I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly,” Hayne says.
“I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the board had dealt with some issues. I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and NULIS on this account is likely to be more than $100 million.
“I thought it telling that in the very week that NAB’s CEO and Chair were to give evidence before the Commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas.”
Regulators
Commissioner Hayne believes the bigger problem with ASIC is its culture, as opposed to its large remit. As a result, he recommends the twin peaks model of financial regulation be maintained.
He wants the regulator to stop prioritising infringement notices and get serious about litigating. And he doesn’t want ASIC staff buddying up with the bankers they regulate, recommending its approach to enforcement focus on separating “enforcement staff from non-enforcement related contact with regulated entities”.
Commissioner Hayne says APRA should retain its existing functions but should jointly administer the Banking Executive Accountability Regime with ASIC, with BEAR extending over time to all institutions regulated by APRA.
The two regulators will have to become closer friends, better sharing information and coordinating their activities to ensure more timely enforcement action. Hayne’s recommendations will see them legally obliged to do so.
Executives within the regulators will also be expected to be accountable in line with BEAR, APRA will face an immediate capability review, and both regulators will face them on a more regular basis. A new oversight authority, independent of government, will be tasked with assessing their effectiveness.
Biggest losers
Mortgage brokers
They’re to move to a fee-based model from commission-based, and Hayne recommended starting with cutting trail commissions and then preventing upfront commissions from lenders, with broker fees to be paid by borrowers instead. Treasurer Josh Frydenberg said the government is worried about what cutting upfront commission would do to competition, and would review the viability of borrower-pays in three years. Labor said it supports all Hayne’s recommendations in principle.
The National Australia Bank's chief executive Andrew Thorburn and chairman Ken Henry
Hayne said NAB stood out from the other three major banks because he was “not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly”.
At least three (unnamed) companies who charged fees for no service
Hayne said he cannot and does not accept that this was done by accident, and “ it is open to a jury to conclude” whether it amounts to dishonest behaviour. “It would be for prosecuting authorities to determine how charges would be framed.”
Car dealers
Hayne said ASIC should cap the commission they can get from selling add-on insurance.
Financial advisers
They won’t be able to take advice fees out of MySuper accounts any longer. Hawking of super will also be prohibited and super trustees won’t be able to incentivise employers to nominate their fund as a default fund. And they’re already facing higher education requirements many are unhappy with.
The stats
76 - The number of recommendations in final report of the Hayne Royal Commission
9388 - number of submissions received and reviewed by Commissioner Hayne and his team
A$470 million - the total amount of remediation payments yielded by the royal commission so far
9 - the number of times Treasurer Josh Frydenberg used the word “misconduct” in his speech responding to the final report
23.4% - the percentage fall seen in ad spending by domestic banks in the fourth quarter of 2018
4 - the number of books journalists are writing on the saga (Banking Bad by Adele Ferguson, The People vs The Banks by Michael Roddan, Money Spinners by Annelise Nielsen, and Wunch of Bankers by Dan Ziffer)
25% - ASIC estimate of financial advice that actually complies with the customer “best interest” test
0 - the number of handshakes between Commissioner Hayne and government ministers
History of banking reviews
The Hayne Royal Commission has no equal in the financial services sector. To date, the majority of reviews have been Committees of Inquiry, which examine the structure and performance of the financial system from an economic perspective.
Royal Commissions, importantly, investigate wrongdoing and make findings in relation to legal matters, including recommendations on prosecutions and or strengthening the legal framework. This goes to the heart of those arguing for a royal commission, as opposed to another inquiry.
1935-37 - Napier Commission: the first Royal Commission appointed to inquire into banking, specifically “the monetary and banking systems at present in operation in Australia”. Recommendations focused on the relationship between the Commonwealth Bank and the wider financial system. Napier recommended the then state-owned Commonwealth Bank be given authority to take control of the assets of any bank that could not meet its credit obligations.
1979-81 - Campbell Inquiry: the first major financial system inquiry, established to “report on the structure and methods of operation of the Australian financial system”. Campbell represents the beginnings of the current regulatory regime, helping usher in widespread deregulation and the floating of the Australian Dollar.
1996-97 - Wallis Inquiry: a financial system inquiry “directed to provide a stocktake of the results arising from the financial deregulation of the Australian financial system since the early 1980s”. Wallis was the first inquiry following deregulation and the privatisation of the Commonwealth Bank. It saw the creation of both APRA and ASIC and new powers and responsibilities for the RBA.
2001-03 - Owen Commission: also known as the HIH Royal Commission: appointed to “examine whether decisions or actions of Directors, officers or associated advisers contributed to the failure or were involved in any undesirable corporate governance practices”. Owen and its aftermath led to four major convictions, including of former HIH director Rodney Adler.
2013-14 - Murray Inquiry: a financial system inquiry “charged with examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth”. In key respects Murray followed on from Campbell and Wallis in its recommendations for institutional reforms, including of APRA and ASIC. In the main it focused on the stability of the major banks and superannuation system in light of the global financial crisis.
2017 - Independent Reviews: April 2017 saw a set of independent reviews released, all three were referenced in the Hayne royal commission. The reviews included the Cooper Review (superannuation system), Ramsay Review (external dispute resolution and complaints framework) and Sedgwick Review (retail banking). Each called for significant structural reform in the financial sector.
2017-19 - Hayne royal commission: established to “inquire into and report on misconduct in the banking, superannuation and financial services industry”. The broad terms of reference make Hayne the most wide reaching royal commission ever established to investigate the Australian financial sector.