Kenneth Hayne issued a ferocious interim report from the financial services royal commission on Friday afternoon, targeting Australia’s biggest financial institutions and the two key regulators, ASIC and APRA. Here are the highlights.
Consumer lending
Hayne finds the banks “had done, and were doing, as little as they thought they have needed to do to meet their legal obligations… there had been occasions when profit has been allowed to trump compliance with the law, and many more occasions where profit trumped doing the right thing by customers.” A key issue here was not merely the inappropriate lending practices of the banks but a general confusion as to whose interests intermediaries such as mortgage brokers were acting.
Financial advice
The recurring issues in financial advice, Hayne says, were “dishonesty and greed”. Describing early financial planning scandals, he notes “regulatory responses, however, focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry. Those responses largely set the tone for future approaches to misconduct…” That criticism also applies to banks themselves, who treated incidents as “a few bad apples”. Hayne is dismissive of that approach, saying:
That generally similar conduct occurred in all of the major entities suggests that the conduct cannot be explained as ‘a few bad apples’. That characterisation serves to contain allegations of misconduct and distance the entity from responsibility. It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity.
The report makes clear that Hayne’s view is there is no justification for the retention of any commissions for advisers, and all “grandfathered” commission not wiped out by the Future of Financial Advice reforms should now be removed.
He then itemises the admitted instances of fee for no service, inappropriate advice and misconduct by advisers. On fees for no service, the big banks, AMP and financial services companies “treated the provision of ongoing services as a matter of no concern to them” when there were contracts for ongoing advice. Advisers “treated ongoing service arrangements as though they were nothing but trail commissions for the advice that had already been given.” Clients couldn’t complain “because the fees they paid were charged invisibly.” Licensees “had neither the systems nor the processes to know whether their authorised representatives were delivering what had been promised.”
This was, Hayne says, “conduct that ignored the most basic standards of honesty” for which no one has been punished. And when advisers have ripped off clients or provided demonstrably bad advice, ASIC almost never took steps beyond seeking to ban advisers, and never used its civil penalty powers. That prompts Hayne to wonder whether the current licensing system — in which companies are licensed, not individuals — should be abandoned.
SMEs and agriculture
Hayne raises the possibility of bringing small and medium business lending under consumer financial services protections. On the vexed issue of guarantors, he in effect calls for suggestions, asking “is there some additional requirement that must be shown to have been met before the guarantee was given if it is to be an enforceable undertaking? Should lenders give potential guarantors more information…?”
Hayne goes on to dismiss conspiracy theories peddled by the likes of Rod Culleton over the Commonwealth’s acquisition of Bank West and its subsequent treatment of Bank West lenders, and struggles to find any systemic issues in relation to agricultural lending, ending the agricultural lending section wondering “is any regulatory change necessary or desirable?”.
Regulatory failure
Why did ASIC fail so badly? Faced with misconduct, “ASIC’s starting point appears to have been: How can this be resolved by agreement? This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed.” ASIC, he says, has “a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing.”
But Hayne is unwilling to recommend dramatic new powers for ASIC to enforce, instead flagging that ASIC may have too much on its plate and that some of its regulatory functions could be moved elsewhere — although he doesn’t mention the obvious candidate, the ACCC.
Above all, for Hayne, it is remuneration that is at the heart of the misconduct he has uncovered. “The culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies.” At this point, however, Hayne hasn’t advanced any solutions — that will have to await the final report next year. That perhaps explains why bank stocks were rising on the share market this afternoon. There’s nothing to fear from Hayne – yet.
Fraudenberg needs to fess up to the fact that the impetus to hold the RC came originally from a couple of Nationals members who’ve pushed this idea unsuccessfully for years. Then at some point a light switched on in the ALP’s collective consciousness who then raised it to prominence.
Despite this the Fraudsters own party and their now head boy voted against it 28 times.
A bit more humility while delivering the executive summary would have been a much better look.
Perhaps some examination needs to be made of the liberal party politicians who had worked at management level in banks, could not have reasonably avoided being aware of (and probably complicit in) the ethically and legally decrepit behaviour now known to characterise Australian banks, then fought so hard to prevent the enquiry from discovering what they already knew. Why?
NAB and CBA shares went up 3 per cent after release of the Interim Report. This is not surprising because, while it is Interim, it said almost nothing – possibly why it was released on Grand Final eve and a long-weekend. Hopefully it is just a case of laying the groundwork and saving the hard hitting stuff for the Final Report.
Interesting that this report is publicly available while an equally important report into how far ScoMo wants to curtail the rights of most of us in the name of religious bigotry is being hidden away in case it influences the Wentworth election.
Isn’t it – but not unexpected. typical shifty behaviour.
ASIC behaves like corporate HR department, all the pretence of caring for the complainant, but in actual fact solely focused on protecting the corporation. They need to create a regualator with no consideration to current corporate models, one they cannot get comfortable with. Maybe a Nauru solution?
I wasn’t aware, to any great extent, of the role that Nationals members had in the agitation for a Royal Commission. Good on them. Thanks for the info, TheRabidHamster.
I’m still laughing about the way this issue blew up in the banks’ (and financial institutions’) and government’s faces – I got modded off a SMH article yesterday for saying this, by the way. Here they were, after denying point-blank for literally years that there was anything wrong in the banking business, having set up a Royal Commission at the behest of the banks, for which the banks virtually wrote the terms of reference and set the (short) timeframe, rubbing their hands in the expectation of being able to paint industry super funds black as part of a whitewash, and – earth-shattering KABOOM!
There’s a lot more to do. We need a corruption and corporate crime watchdog with teeth. That’s more than we’ll ever get with the likes of ASIC, or even ACCC. As it stands, the likelihood that any of the financial services industry’s really senior executives will ever see the inside of a jail cell is vanishingly small. I’m hoping that Labor will establish a Federal ICAC straight away if elected, with corporate crime such as this ongoing scandal as part of its remit. maybe then we might see some justice.
Did you ever expect our liberal ex bankers to allow an investigation into what they already knew and had been a part of ?
As it is, many of the are perturbed that this commissioner has, in spite of the short term and limited funding, seemed to find much more than any of them wanted public.
Of course I didn’t. And in fact the Lib politicians didn’t “allow it” off their own hook. The banks did it to themselves. Classic case of hoist with their own petard.
Now, of course, very same pollies who were busily denying everything a few short months ago are piling on, saying with (faux) horror, how bad the bankers are. Hypocrites all.
I hope that Labor, if elected soon, extends the Commission’s terms of reference and investigation period, while actively pursuing prosecutions for what’s been uncovered so far. But I’m not holding my breath.
Hayne’s conclusions about finance firm wrongdoing and ASIC having “too much on its plate” and considering that “some of [ASIC’s] regulatory functions could be moved elsewhere” studiously avoid addressing the fact that ASIC’s actions (or lack of) make perfect sense when you look at the conditions of the system that they are working in. However he doesn’t quite manage to make the connection between these conclusions and the system from which they inevitable emerge.
For example, as Crikey has catalogued, ASIC has been the subject of so many funding cuts justified on the basis of neoliberal principles (efficiency, reducing public spending, budget cuts to “get the budget back in the black”). ASIC is staffed by people schooled in a university system that only teaches the principles of financial capitalism (i.e. most 101 courses start with the proposition that “the firm exists to make profit” – which is true of course but not the whole picture). ASIC is staffed by people who have come from or go to work in for-profit financial services (which also makes sense because that is where most finance career opportunities are). ASIC takes a conciliatory regulatory approach I suspect partly because there is a massive information asymmetry between ASIC and firms. Perhaps ASIC reasons that a more aggressive would encourage firms to withhold information?
This lack of consideration/perception of the system and circumstances of Australia’s finance industry and ASIC is a theme from the whole report. Unfortunately while Hayne almost gets to identifying the systemic nature of the dishonesty and malfeasance falls short because he is a black letter lawyer and judge, trained in the notion that “the law is the law” at the expense of considering the reality in which Australia’s finance system operates.