Financial services royal commissioner Kenneth Hayne has struggled with, but ultimately failed to address, the systemic problems of Australia’s financial industry. His recommendations for reform — common sense in many areas, timid and tepid in others — won’t address the deep-seated faults that drive the industry-wide misbehaviour he uncovered. This is what he should have recommended:
Kill vertical integration
For a report so stridently hostile to conflicts of interest, Hayne fails to address the most basic one — the vertically integrated structure of the financial industry. It’s true that most of the big banks are abandoning vertical integration and what turned out to be the fool’s gold of cross-selling, but the model is still embedded in some areas and could return in the future. Major financial institutions should have to pick one role — basic banking, financial advice, wealth management — and stick to that.
That will mean the major banks return to being like utilities, providing basic financial services that provide a lucrative but low-growth revenue stream. Investors will have to accept that the big four will no longer be the cash machines they’ve been in recent years.
Kill personal insurance
The personal insurance industry — particularly life insurance — has been revealed as a giant scam. Subjecting insurers to tougher regulation (applying unfair contracts law, banning hawking, and making claims-handling a “financial service”, as Hayne recommended) isn’t enough. Governments need to return to the insurance sector, re-establishing government-run insurance services and banning corporate personal insurance services — especially funeral insurance and TPI (totally or partially incapacitated) insurance where mis-selling is notorious and spying on clients is invasive and wrong.
Individual licensing of financial advisers
Close but no cigar from Hayne: he recommends individual registration of planners — so the minority of advisers who are crooks and shonks can be better tracked — and a stronger industry disciplinary system as well as greater requirements for information sharing. But he’s happy to retain the existing model whereby companies hold financial advice licences, not the individuals they employ. There’s a simple principle here: if financial advisers want to — as is now universally agreed — become more like a real profession, then being individually licensed is central to that, including the capacity to lose your licence for misconduct, rather than simply move to another company.
Restore consumer protection to the ACCC
There’s one recommendation that would have deeply alarmed bank executives on Monday — stripping ASIC of the consumer protection role in financial services and restoring that to the ACCC, which takes its responsibility to go after corporate crooks seriously. The days of cosy deals, regulators waving away serious crimes and bankers dictating their own “punishments” would be over.
Overhaul corporations law to increase the likelihood of prison
Hayne wants a more aggressive, litigious ASIC. He also wants criminal prosecutions for the fee-for-no-service scandal. But it’s difficult to prosecute individuals for corporate misconduct. There have been recent steps to increase the financial penalties for corporate crime to reflect the scale of wrongdoing and ensure firms have a net loss from misconduct. But individuals will only behave if they think there’s a real chance of going to jail, and at the moment because of the way laws are drafted, and the unwillingness of ASIC and courts to lock up white-collar criminals, it’s too difficult to jail corporate crooks for anything other than blatant criminality.
Currently, the groups and people that may be sued by ASIC have the deepest pockets and the incentive to drag cases out for as long as possible to exhaust the limited resources of the regulators.
Compensation for stolen funds
There’s another handy way to create an incentive for financial institutions never to charge fees to which they’re not entitled: a compulsory compensation scheme that sees defrauded customers refunded not merely the full amount plus interest, but a multiple of the full amount. That will create an incentive to make sure that — to use Hayne’s term about the NAB — money doesn’t just fall into bankers’ pockets through (so they claim) carelessness, because they’ll have to repay two or three times that amount if they get caught.
And to cover firms that go broke, it should be funded by a levy on all financial contracts — if the Howard Government could do it to pay for the HIH collapse, it can be done again.
Mortgage broker fees
Hayne’s recommendation to abolish commissions to mortgage brokers and require borrowers, not the banks, to pay fees might curb conflicts of interest but it will significantly strengthen the banks. End trailing commissions and set a maximum fee or commission, by all means. But focus on requiring banks and brokers to list fees and commissions in addition to the charges associated with the loan, and give borrowers the option to either pay these fees themselves (as Hayne wants) or lumped into the borrowed amount — subject to compulsory financial advice.
As I pointed out yesterday, Ken Hayne’s recommendations do not constitute a ceiling on reform. We all have all the evidence too. In my view, Labor will kick a big goal if it adopts these measures as its policy. And when it wins the next election, nobody will be able to trot out the flawed ‘mandate’ bullshit started by Howard. If Labor achieves a landslide, it will have the banks and other financial services exactly where we want them to be – on the point of the sword.
Surely, there is now an opportunity for government(s) – federal or state – to (re)establish banks. However far the public’s opinion of governments has fallen, the reputation of the banks is now even worse. Some of us old folk always picked the public over the private option (e.g. publicly owned Qantas or Medibank) on principle when it was available as such. The debacles that have accompanied several decades of privatisation should tempt many to do so again.
Oh, it is easy as ABC, Bernard, the arm-chair expert.
The Reserve Bank Chairman Philip Lowe told Australia what went wrong today. The Banks are going for sales, and when they get them they go for more sales. So the Banking ethics are being eroded away because of a “push factor” by shareholders for the Banks to make more and more Money. Philip Low said Australian Banks are making 13 percent on their money while overseas the average is 10 percent.
So the Banks have unhinged themselves from the Australian people as part of society for the good of the nation to become money makers. And that is all because of the push factor of shareholders.
Shareholders are there to make money, and when they don’t think they are making enough money, they begin to pull their money out and walk away. So shareholders have got the Banks at gunpoint and the victims who pay out is the Australian public because ethics and morals in Banking are breaking down. The Banks don’t look after the customer any more. They look after themselves.
That is borne out by the 13 percent income they are earning.
What is wrong with knocking off 4 percent and for the Banks to earn 9 percent, 1 percent lower than the world standard?
What is wrong with that? What is wrong with that is that the shareholders will get upset, walk away and put their money into housing and negative gear as Real Estate has become a sort of a bank, an opposite investment force opposing the Banks as investment and yet the Banks are part of the deal into housing. Who is in control of all this breakdown? The government, they have the levers to pull and push but no one is at home.
Perhaps this is another consequence of 27 years of uninterrupted economic growth. Morrison says the young don’t know what a recession is like but perhaps also the majority of Australians, including those of us in our 60s, have come to expect as an entitlement that our money will continue to grow in investments and provide a strong return.
Who gives a stuff what Morrison says?
You do.
Look, Morrison is going out because he can’t lead the government like Turnbull could.
Is it me, or are (most) shareholders the ultimate ticket clippers?
They get rewarded for the effort of others on the basis that they bought some shares from a third party.
And let’s not forget that they benefited from the poor behaviour of the banks.
I have never been tempted to buy bank shares, we now see it would be akin to investing in a crime syndicate.
I agree, Keane is an armchair pontificator.He pays no attention to Hayne’s strenuous defence of Julia Gillard’s financial reforms. Abbott tried to abolish them, then only managed to defund APRA, and Costello set up ASIC under the ridiculous Efficient Markets Hypothesis [no bubbles!]
It is an error that Keane supports the ACCC. Good in ordinary markets but useless in financial markets – as seen in the ACCC “markets” will decide best super fiunds. Markets of producer=customers say for milk, are v different to financial markets where sellers/buyers are usually interchangeable and lead to bubbles and drastic crashes. Look at The Big Short, Keane. Finally, the RC has no remit to propose new policy – Parliament does. The May elections are therefore crucial.
It is futile to fine a corporation. The fine just becomes a business cost. If the fine really hurts, it is more likely that workers will be turfed than bosses . Confiscation of shares might be a better way. … Neocons and free market tragic so would go apoplectic.
Thats a very good idea, perhaps the shares could go towards repaying the victims of any fraud and act like a trailing commission, whoever banks/ FS steal from will eventually have some say in bankers personal remuneration.
What Hayne should have done was recommend an extension of the Royal Commission and a widening of the terms of reference to fully investigate the financial industry.