Introduction

The Banking Royal Commission final report was released to the public on 4 February 2019. In the report, Commissioner Hayne has made 76 recommendations, some of which may have significant impacts across the banking, superannuation and financial services industry, and those who regulate it.  While no individuals have been referred for criminal prosecution, the Commissioner has identified 22 entities as having engaged in possible misconduct. The report also recommends expanding enforcement powers for regulators and increasing penalties for law breakers.  Given the endorsements received from both sides of Government to the majority of the recommendations, there is little doubt we will see swift legislative and regulatory action.

The underlying issues

Commissioner Hayne prefaced the report with four observations which underpin his recommendations:

  1. The conduct of entities and individuals was driven by the pursuit of profit and gain.
  2. Their conduct was enabled by an imbalance of power and knowledge between those providing products and services and those acquiring them.
  3. Financial service intermediaries had conflicts of interest in acting for customers.
  4. Financial services entities that broke the law were not properly held to account.

The Commissioner was particularly critical of the entities in the financial services industry, the management of those entities and the conduct of regulators:

“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: their boards and senior management”

“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 recommendations of the Commissioner in response to these observations, if adopted, have far reaching consequences for the banking, superannuation and financial services industry.

In this Limelight, we provide an overview of the comments and recommendations in the report.  We will be issuing more detailed analyses as we dissect the very many issues spanning the substantial report.

Recommendations highlights

The 76 recommendations by the Commissioner cover a spectrum of matters. We highlight the key recommendations below:

Banking:

  • Imposing duty on mortgage brokers to act in the best interests of the borrower (not the lender) in the form of a civil penalty provision.
  • Requiring the borrower (not the lender) to pay broker fees and banning trail commissions.
  • Regulating mortgage brokers as if they were providing financial advice.
  • Making provisions in the 2019 Banking Code that govern the terms of consumer contracts ‘enforceable code provisions’ that if contravened will constitute a breach of law.

Financial Advice:

  • Establishing mandatory financial services industry codes with ‘enforceable code provisions’ that if contravened will constitute a breach of law.
  • Requiring ongoing fee arrangements to be renewed annually, recording services to be provided and approved by the client.
  • Requiring financial advisers to disclose to clients any conflicts of interest, bias, partiality or lack of independence before providing personal advice.
  • Repealing grandfathered provisions of conflicted remuneration as soon as possible.
  • Reducing commissions for life risk-insurance products to zero.
  • Reviewing and banning and remaining conflicted remuneration exemptions.
  • Requiring licensees to report “serious compliance concerns” about financial advisers to ASIC on a quarterly basis.
  • Requiring licensees to enquire into any advisor misconduct they detect and informed and remediate affected clients promptly.
  • Creating a new disciplinary system for financial advisers, requiring all advisers to be registered and a single disciplinary body to oversee the system.

Superannuation:

  • Prohibiting trustees from assuming any obligations beyond those arising out of their duties as a trustee.
  • Establishing a single default super fund for all workers – customers to be “stapled” to a single default account.
  • Banning advice fees deducted from MySuper accounts.
  • Prohibiting advice fees for non-MySuper accounts in most cases.
  • Abolishing the use of heavy handed techniques to sell superannuation.

Insurance:

  • Abolishing the use of heavy handed techniques to sell insurance.
  • The handling of insurance claims should be defined as a “financial service”.
  • Amending the duty of disclosure under the Insurance Contracts Act to be a duty to take reasonable care not to make a misrepresentation to an insurer.
  • Requiring unfair contract terms provision in the ASIC Act to apply to insurance contracts and the main subject matter of an insurance contract be the terms describing what is being insured.

Culture and Governance:

  • Requiring greater guidance and supervision by APRA of the remuneration systems of and the handing of misconduct by regulated institutions.
  • Requiring all financial service companies to review at least once a year the design and features of their remuneration systems for frontline staff.
  • Requiring all financial companies to assess their own culture and governance.

The Regulators:

  • Retaining ASIC and APRA and establishing a new independent authority to oversee and assess the two regulators to ensure they are carrying out their responsibilities.
  • Overhauling ASIC’s approach to enforcement, with a focus on court action rather than infringement notices for non-administrative failings.
  • Continuing ASIC’s annual reporting of breaches of financial service regulations but in future name the companies involved instead of just the type of breach.
  • Requiring steps to oblige greater cooperation between ASIC and APRA.
  • Simplifying regulations to eliminate qualifications and exceptions as much as possible and expressly identifying fundamental norms of behaviour being pursued by regulations.

The Commissioner has also referred to regulators a list of misconduct by multiple entities for possible criminal or civil action.

The Implications

Much of the conduct highlighted during the Commission is contrary to existing laws and regulations and required notification to regulatory authorities. Much of it had, in fact, already been notified.  The Commissioner has said in no uncertain terms that regulatory response should have been swifter and more proximate to the seriousness of the conduct.

By way of example, the Commissioner noted in the final report that the charging of fees for no service was obviously wrong, occurred over many years and is conduct open to findings of dishonesty and contraventions of the Corporations Act.

Despite this, the Commissioner noted that ASIC appears not to have considered the application of the criminal law in connection with fees for no service until oral evidence was given during the Commission hearings. In addition, only now are the financial institutions taking steps to compensate customers for charging fees for no service. The Commissioner expects this to be more than $850M.

Instead of recommending wholesale changes, the Commissioner has made recommendations aimed at enhancing existing financial regulation and oversight mechanisms and promoting cultural change. The recommendations are primarily targeted at:

  • improving the culture and underlying constructs of institutions to eliminate practices that promote conduct contrary to the interests of consumers; and
  • strengthening the roles and responsibilities of regulators to facilitate the imposition of regulatory action and penalties for conduct contrary to laws and consumer interests.

We expect that swift steps will be taken to implement the Commissioner’s recommendations given the bipartisan support of the majority of recommendations by both major political parties (subject of course to the inevitable politicking of issues).

For mortgage broking, the recommendations look to completely overhaul how brokers are remunerated and thereby the industry, with the aim of aligning the interests of brokers and customers.

As to the provision of financial advice, while no overhaul has been proposed to integrated selling and the conflicts of interest this creates, changes have been recommended that target the disclosure of conflicts or misalignment of interests, the structure of fee arrangements and remuneration, and the handling of identified misconduct and remediation.

Recommendations targeting the superannuation industry aim to remove the charging of advice fees, eliminate the use of heavy handed tactics to sell products and limit the possibility of superfund trustees having a conflict with their duties as a trustee. This is likely to result in advisors being unable to act in another capacity if they choose to act as a trustee.

The implications for the insurance industry are also potentially significant. Particularly given claims handling has been proposed to be regulated as a “financial service” and the proposal that unfair contract terms provisions in the ASIC Act apply to insurance contracts.

Beyond the recommendations directly targeting the insurance industry, insurers should also be on the lookout for increased regulatory action, notifications and claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.