Former High Court Justice and Royal Commissioner Kenneth Hayne handed down his final report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry just after the closure of the financial markets yesterday afternoon.
Unsurprisingly, Commissioner Hayne concluded that greed has been the driving factor in banking practices to date, but what should be noted is that this greed was well beyond what might be expected of a bank. The Report speaks of a culture where profit is rewarded above all else with incentives and rewards offered irrespective of the sale being conducted according to law or policy.
Click here to view the report.
What are the recommendations?
Commissioner Hayne put forward a number of recommendations, some of which could present significant changes for the banking, superannuation and insurance sector, including:
- A legal duty by mortgage brokers to act in the best interests of the borrower, punishable by civil penalties.
- A requirement that borrowers, rather than lenders, pay the mortgage brokers’ services, with Lenders barred from providing a trailing commission to mortgage brokers on all new loans.
- Grandfathering commissions to financial advisors to be banned.
- Creation of a disciplinary body and disciplinary system for financial advisers.
- Banks to be barred from charging dishonour fees on basic accounts.
- Banks to be barred from charging default interest on loans to farmers in areas affected by drought or other natural disasters.
- Motor dealers providing finance no longer to be exempt from national consumer credit laws.
- A cap on commissions to motor dealers for add-on insurance products.
- Commissions on life insurance products reduced to zero.
- A single default superannuation fund for all workers to be carried over or ‘stapled’ to members as they move jobs.
- No advice fees to be deducted from MySuper accounts.
- Unsolicited selling of superannuation and insurance products banned.
- Funeral expense insurance policies no longer to be exempt from being a ‘financial product’ and therefore coming under ASIC regulation.
- Creation of a new authority independent of Government to oversee ASIC and APRA.
- Establishment of a Government funded compensation scheme of last resort for victims of financial misconduct.
Will the Report lead to further tightening of lending practices?
Commissioner Hayne stopped short of recommending changes to the determination of loan suitability, confirming that in his view, the law is satisfactory if applied as is. The Commissioner, however, identified that application of the present law requires more investigative effort than has traditionally been adopted. For example, adoption of a median household expenditure value does not constitute verification of a borrower’s expenditure. While most commentators do not expect further tightening of lending to the extent that it may put added pressure on the business and property markets, it’s safe to assume that there won’t be any relaxations any time soon and there are still some lenders that may need to bring their practices into line.
How has the Government responded?
The Government has openly stated that it will move on all 76 recommendations in the Banking Royal Commission Report, although Australian Banking Association (ABA) CEO Anna Bligh has already said that some of these will need closer review, in particular, the Commissioner’s recommendation on shifting the payment of brokers onto customers. This could, of course, have material consequences for the brokerage industry. The Government was quick to promise that it will establish the compensation scheme of last resort recommended in the Report. We will have to see what further measures are announced by the Government in the coming days.
Will we be able to trust the banks again?
Significant emphasis has been placed on the banking sector needing to regain the trust of the Australian people. One of the comments made by Commissioner Hayne was his concern that banking officials interviewed as part of the hearings of the Commission did not appreciate, to his satisfaction, the misconduct that occurred and therefore the steps that should be taken to avoid reoccurrence. Consequently, while a review of the law may bring consumers some comfort, it remains to be seen how the banks will address the issue of customer trust.
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