Commissioner Hayne is more comfortable in a checked shirt and chinos than in a business suit, and he generally shuns the limelight. But at the high bench of the Royal Commission hearings, he was utterly in his element.
Hayne released his final report in February 2019. The main volume of the report runs to more than 76,000 words and contains 76 recommendations. The report refers to the reviews and inquiries that preceded it, including the Cooper Review, the Murray Inquiry, the Ramsay Review, the Sedgwick Review and the Wallis Inquiry. This is well-trodden ground!
The report drew on an extensive foundation of evidence. Via the Royal Commission’s website, members of the public submitted more than 10,000 complaints about Australia’s financial services businesses. People also made complaints and offered input via telephone calls and emails to the Office of the Royal Commission. During the hearings phase, the Royal Commission heard harrowing evidence from victims. Commissioner Hayne and counsel assisting grilled CEOs, board chairs and the heads of ASIC and APRA, among others.
Unsurprisingly, the final report damned the banks’ culture and the bankers’ greed. Commissioner Hayne also made biting comments about the conduct of individual bank executives and board members, and he pointed to the corrosive effects of conflicting interests.
‘Experience shows that conflicts between duty and interest can seldom be managed; self-interest will almost always trump duty,’ Commissioner Hayne said.
Commissioner Hayne’s findings can be grouped into four key observations.
The connection between conduct and reward
The financial services sales culture is crucial to how organisations and staff conduct themselves. People act according to how they are rewarded or punished.
The bad conduct was driven by the banks’ pursuit of profit but also by individual employees’ pursuit of gain. The interests of customers were relegated to second place. Roles became messy and confused. Customer-facing staff had become sellers, not helpers, and not people acting as though they had a fiduciary responsibility.
Staff performance arrangements across the financial services industry emphasised sales and profit, instead of compliance with the law and adherence to proper standards. In some cases, rewards were paid regardless of whether sales were made in accordance with the law and sound principles.
The asymmetry of power and information between financial services entities and their customers
Customers have very little power. The financial business set the terms on which they will deal; consumers often have little detailed knowledge or understanding of the transactions they are entering into, or on what specific terms.
Often, it is difficult for customers to make informed choices between the array of available products.
Financial services organisations and personnel acted how they did because they thought they could get away with it.
The effect of conflicts between duty and interest
Customers often deal with banks and other financial services organisations through intermediaries such as advisers and brokers. This gives rise to the old problem of conflicting interests: who are the intermediaries working for? The customers or the finance businesses paying the commissions?
Customers might have reasonably assumed that the people standing between them and the finance business would provide a service or product in their clients’ interests. But, in many cases, the incentives were very different. The intermediaries were paid by the providers of the services or products. In many cases, the intermediaries acted only in their own interests.
Commissioner Hayne on conflicts of interest:
'The Corporations Act 2001 and the National Consumer Credit Protection Act 2009 speak of ‘managing’ conflicts of interest. But experience shows that conflicts between duty and interest can seldom be managed; self interest will almost always trump duty. The evidence given to the Commission showed how those who were acting for a client too often resolved conflicts between duty to the client, and the interests of the entity, adviser or intermediary, in favour of the interests of the entity, adviser or intermediary and against the interests of the client. Those persons and entities obliged to pursue the best interests of clients or members too often sought to strike some compromise between the interests of clients or members and their own interests or the interests of a related third party (such as the person’s employer, or the entity’s owner). A "good enough" outcome was pursued instead of the best interests of the relevant clients or members.'
Holding entities to account
Misconduct will only be deterred if people and organisations believe misconduct will be detected and pursued and justly punished. But many of the worst performing finance businesses were not properly held to account. The obligation to pay compensation is not enough of an incentive to stop misconduct or wrongdoing. Nor is the issuing of a media release.
Commissioner Hayne: ‘The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account. The community recognises, and the community expects its regulators to recognise, that these are two different steps: having a wrongdoer compensate those harmed is one thing; holding wrongdoers to account is another.’
The Royal Commission referred 24 cases to ASIC and APRA for further investigation and potentially prosecution. The final report recommended an immediate end to grandfathered commissions for financial advisers; annual reviews of ongoing financial advice fees to be agreed with customers; and a new disciplinary system for financial advisers. It also recommended that mortgage brokers be paid by borrowers rather than lenders. Major recommendations are summarised below.
- Clients: Review and renew all ongoing fee arrangements annually.
- Government: Retain the dual, ASIC-APRA model of financial regulation. Establish an independent oversight body for APRA and ASIC. Require all financial advisers who provide personal financial advice to retail clients to be registered, and subject to a single, central disciplinary body. Repeal ‘grandfathered’ commissions. Reduce to zero the cap on life insurance commissions. Ban mortgage brokers’ commissions (over a period of two to three years). Subject mortgage brokers to the same laws that apply to financial advisers who give personal advice. Ban hawking of insurance and superannuation products. Remove the exemption on the sale of funeral insurance. Review the exemption of commissions on general and consumer credit commissions. Apply the unfair contract terms in the ASIC Act to insurance contracts. Extend the BEAR scheme to the financial regulators and super trustees. Ban those trustees from assuming obligations other than ones related to being the trustee of the fund. Ban deduction of advice fees from MySuper accounts. Ensure employees have only one default super fund. Ban super trustees from schmoozing employers in order to have their fund nominated as a default fund. Give ASIC the power to enforce all provisions in the Superannuation Industry (Supervision) Act 1993 that are, or will become, civil penalty provisions.
- ABA: Amend the definition of ‘small business’ in the Banking Code.
- APRA: Ensure sound management of misconduct, compliance and other non-financial risks in its supervision of bank remuneration systems. Set limits on the use of financial metrics in connection with long-term variable remuneration.
- ASIC: Approach regulatory enforcement in a way that starts with the question of whether a court should determine the consequences of a contravention. In cases where the infringing party is a large corporation, use infringement notices mainly for administrative failings, and only rarely as an enforcement tool. Cap the amount of commission that can be paid to car dealers for the sale of add-on insurance.
- ASIC and APRA: Jointly administer the BEAR Act, which should be amended to require executives to deal with them in an open and constructive way.
- Financial advisers: Disclose their lack of independence or impartiality.
- Banks: Review at least once a year how they structure remuneration for front-line staff.
- Mortgage brokers: Act in borrowers’ best interests.
Underlying principles proposed by Commissioner Hayne to guide the conduct of financial services providers:
Six norms of conduct:
- obey the law;
- do not mislead or deceive;
- act fairly;
- provide services that are fit for purpose;
- deliver services with reasonable care and skill;
- when acting for another, act in the other’s best interests.
- the law must be applied and its application enforced;
- industry codes should be approved under statute and breach of key promises made to customers in the codes should be a breach of the statute;
- no financial product should be ‘hawked’ to retail clients;
- intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary;
- exceptions to the ban on conflicted remuneration should be eliminated;
- culture and governance practices (including remuneration arrangements) both in the industry generally and in individual entities, must focus on non-financial risk as well as financial risk.
Comments on the final report
The proposed changes for financial regulators are important. There has long been a major confusion of roles between ASIC and APRA, for example, and also between those two and the ACCC. Commissioner Hayne recommended that the powers of ASIC and APRA be more clearly delineated. He also proposed a new body to monitor their conduct; twice-annual reviews of the regulators; and greater collaboration and sharing of information.
The superannuation-related recommendations are also important. Commissioner Hayne recommended a ban on advice fees for low-balance super accounts. He also recommended a ban on the hawking or ‘unsolicited sale’ of super products. Commissioner Hayne looked closely at the proliferation of superannuation accounts – the current situation in which many people hold multiple accounts, often unwittingly. He recommended that there should only ever be one account for each of us.
Commissioner Hayne’s report has done a lot of good. Building on the Corporations Amendment (Future of Financial Advice) Act 2012, it has clarified the legal obligations that financial service providers owe to their customers; and it has laid out important changes to how financial services businesses will be monitored and regulated. But the final report didn’t go as far as it might have, or perhaps should have.
In large part, the report was received by the financial sector as less of a hard whack than a gentle smack. It was referred to in the financial media as a damp squib, a soft landing – choose your metaphor. In the lock-up before the report’s official release, ABA chief Anna Bligh delved anxiously into the final report’s pages – and then she reportedly sat back and relaxed, the stress visibly lifting from her shoulders. (Anna Bligh said those reports were false.)
After the Royal Commission’s final report was released, the financial markets saw a spectacular ‘relief rally’, including the biggest ever daily increase in the banks’ combined market capitalisation. Even the troubled AMP and IOOF saw their share prices surge.
All sorts of calamities were predicted as a result of the report’s release and recommendations. Coinciding as it did with a slowdown in the residential property market, some people feared that the report would make house prices fall further, perhaps by making debt more expensive and lending standards more stringent. Most fears of that kind have not been realised (and most just served the interests of people in the property and finance sectors).
Few people faulted the Royal Commission’s process, or questioned the validity of its findings, but there were some significant voices of criticism. Some observers, for example, claimed that Commissioner Hayne was too soft on the bankers he was investigating, or to the legal and regulatory system that had failed the banks’ customers. Another criticism was that the report didn’t do enough for regional Australia.
In the years leading up to the Royal Commission, the banking regulators had clearly failed. But now, we are supposed to believe, those same regulators are to be a central part of the solution. Right now, the regulators are talking tough, but how long will that last? And if they overreach or over-correct, which is entirely possible, what happens when the courts take a different view and put them back in their boxes? The answer is that customers will again lose out.
People have rightly noticed that the Royal Commission has left behind a good deal of unfinished business; on mortgage brokers; on life insurance sales and on the potentially criminal conduct of organisations and individuals.
The recommendations steered clear of several important frontiers for further reform, including whether to establish a different regulatory structure; whether to constrain bankers’ remuneration; whether to increase competition in banking and financial services; whether to disallow for-profit super funds or to require super fund businesses to offer no frills, low-fee accounts; and whether to force ‘vertically integrated’ financial services businesses to separate (such as by splitting wealth management from financial advice services). These arguably represent wasted opportunities for reform.
Bank culture was a central focus of the Royal Commission hearings and the recommendations. In banking, greed is definitely not good. But changing culture quickly is extremely difficult. There is reason to be pessimistic about how far the Royal Commission recommendations will fundamentally change the way bankers and financial advisers work, and whose interests they serve.
The federal government jumped at the chance to say ‘yes’ to Hayne, given the public profile that the Royal Commission had received, and given the sense of relief at the findings. The government promised to take action on all 76 recommendations, though it did baulk at some things, most notably the blanket ban on commissions for mortgage brokers.
The government’s argument: such a ban would impede competition. That may be true, but there is still more work to be done in that sphere to ensure mortgage brokers are helping customers and not just banks.
Overall, Commissioner Hayne and the Royal Commission deserves a mixed report card. The Royal Commission shone an invaluable light on the conduct of financial services organisations. People with serious and legitimate grievances were given a forum and a robust process in which to tell their stories. Many of the findings and recommendations are important and overdue. But there is much unfinished business, and even in the areas of recommended reform there are major barriers ahead.
The emphatic ‘relief rally’ in the share prices of the financial services businesses should make us all at least a little bit nervous. What is the chance that the Hayne Royal Commission will be shrugged off as a temporary regulatory nuisance, a legal blip, just like most of the other inquiries that took place over the past century or so? The likelihood of that is far from zero.
Ongoing beneficial reform, and ongoing protection of consumers’ interests, will require vigilance among customers, industry bodies, regulators and governments. We all need to ask ourselves: how can we make the reforms stick? How can we keep the spotlighted abuses front-of-mind? And how can we best push into the areas of important reform that Commissioner Hayne put in the too-hard basket?
We are still a long way from a financial system that consistently operates in customers’ interests. And a century of experience has shown that change will only happen if customers and governments drive it.