The Hayne royal commission has called for new powers for regulators to clean up the financial services sector.
In his final report into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne recommended a new regulatory body to oversee the Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA).
Commissioner Hayne presented the near-1000 page report to Treasurer Josh Frydenberg on February 1.
The report includes 76 recommendations including overhauling regulating bodies and industry codes, curbing commissions on sales, upfront loan fees, improved co-operation between regulators ASIC and APRA, the establishment of a compensation scheme of last resort, and strengthening codes of conduct.
While the report does not recommend charges against individuals, 22 companies have been referred to ASIC or APRA for criminal or civil charges.
The commissioner was scathing in his assessment of conduct by the banking and financial services sector.
“First, in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business,” he wrote in the report.
“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.”
The time has come for action, he wrote.
“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.”
The government has promised to act on all 76 recommendations, including a review in 2022.
“The price paid by our community for this misconduct is immense and goes beyond just the financial,” Frydenberg says. “From today, the banking sector must change and change forever.”
Recommendations in the report would close exemptions and loopholes in Australia’s consumer protection laws, says Consumer Action Law Centre CEO Gerard Brody.
- the ability of mortgage brokers to charge conflicted remuneration, starting with banning trailing commissions;
- exemptions to licensing requirements for car dealers and retailers that sell loans;
- exemptions for funeral expenses policies from important consumer protections;
- “unfair contact term” exemptions for insurers; and
- regulatory oversight of insurance claims-handling.
Enhanced consumer protections include:
- a “best interests” duty for mortgage brokers, treating them like other financial advisers;
- banning “hawking” or unsolicited selling of insurance, including funeral insurance;
- enhanced rules for add-on insurance, requiring a consumer to opt-in to the purchase of an insurance product bundled with a loan or car;
- sanctions for breaches of industry codes applying to insurance and banking;
- new banking code provisions benefiting low-income and vulnerable groups, including banning unarranged overdrafts and default charges on basic bank accounts;
- a new compensation scheme of last resort to compensate consumers where the entity does not or is unable to pay, including compensation for historical uncompensated claims;
- greater public accountability of remediation schemes, including having the Australian Financial Complaints Authority provide oversight; and
- extending the Banking Executive Accountability Regime to consumer protection matters, and beyond the big banks.
The report recommends that “the borrower, not the lender, should pay the mortgage broker a fee”, and calls for a ban on lenders paying trail commission to mortgage brokers.
The report represents a turning point for the banking and financial services industry and its lobby groups, says CHOICE CEO Alan Kirkland.
“Commissioner Hayne makes it clear: the laws that govern the banking system have not been up to the job,” he says.
“Simple community expectations – that financial institutions should act honestly and in their customers best interests – have been undermined by decades of industry lobbying, resulting in laws that are riddled with carve outs and exceptions. This has to end.”
Kirkland says the report represented a key turning point for the financial services industry and its lobby groups.
“Will they pretend to accept the recommendations then lobby to undermine them behind closed doors, as they have with every other major reform? Or will they realise that if they want to win back community trust, this time they need to act with integrity?”