The Royal Commission’s Mammoth Report

The bombshell report of the Royal Commission is finally out.

The report depicts how the Banking, Superannuation and Insurance industries have treated their customers and employees. It highlights the expectations that customers should be compensated, while also addressing the need for financial services that break the law to be held accountable.

“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.”

Below are a few major highlights of the long-awaited final report:

NAB stood out in the report as the Commissioner is not convinced that Andrew Thorburn and Chairman Ken Henry have learnt the lessons of past misconduct.“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 financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again.”

The Regulators also came under heavy criticism. The Commission was very critical of ASIC and APRA and highlights their unwillingness to prosecute misconduct. He recommended a New Oversight Authority to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.

 Recommendations for Banking sector:

• Mortgage brokers should act in the best interest of the borrowers and not the lenders. Brokers are often provided a financial incentive that works against the borrower’s interests. The obligation will be under civil penalty provision. The report outlines a list of recommendations for the banking industry.
• Definition of “small ”
• Farm debt mediation
• Charging default interest
• Bear Product Responsibility

Recommendations for Financial Advice- Superannuation and Insurance:

Financial advice:

• Ongoing fee arrangements must be renewed every year by the client
• The government and ASIC to review the effectiveness of the measures that have been implemented to improve the quality of financial advice
• Calls for a new disciplinary system for financial advisers

Insurance:

• No hawking of Insurance
• Sales of dodgy funeral insurance to be brought to an end
• Remove the exclusion of funeral expenses policies from the definition of ‘financial product
• Car dealers will be facing tougher regulations and insurance products pushed at the point of sale of goods will be subject to responsible lending obligations
• Cap on commissions

Superannuation:

• One default superannuation account
• No hawking
• No deduction of advisory fees from My Super accounts

All in all, even though the report uncovered the appalling practices and behaviour in the banking, financial services and superannuation industry, the recommendations on the banking sector were not as drastic as expected and will likely have a limited financial impact on the banks.

Impact of Commissioner Keneth Hayne’s Report

Big banks surged on the open today as investors were relieved that the recommendations did not handicap the banks, as initially expected. We also note that there also no additional pressure on lending which is positive.

However, mortgage brokers’ stocks took a beating. “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”

Australian Financial Group Limited and Mortgage Choice Limited’s share price dropped sharply.

Are the big banks getting away with it again? The report addresses many issues but may still be too lenient on the banking sector.