Banking shake-up: The big lessons from the Hayne royal commission
In the five years since the final report of the landmark financial inquiry was delivered, the big banks are still finding their way.
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The hearings and later findings of the Hayne Financial Services Royal Commission went off like a bomb through the banking, superannuation and financial services industry, and the fallout is still being felt years later.
Coming out of the 76 recommendation of the three-volume final report delivered to the government this week five years ago, Commissioner Kenneth Hayne laid out a road map for an industry in desperate need of reinvention.
The big banks, which were most in the sights early for Hayne, were able to make a brutal break with the past and hive off problem wealth management businesses. The exits were mostly under way by the time he delivered his final report in early 2019.
Westpac’s exit would take years, delayed by its own money laundering scandal.
However, the banks used the painful Hayne examination to come out more reputation focused and purpose driven.
There is no question that banks are today more responsive to customers over profits. The forgiveness of hundreds of billions of dollars in loans during the early days of the Covid-19 pandemic – unprecedented in Australian banking – ranks as the industry high point for putting customers first.
But this cultural switch too has come at a cost, given they are now inherently more conservative in every part of their operation. There is an opportunity cost to this for an economy that badly needs more dynamism.
This low-risk approach is now coming to light now in the numbers with freakishly low credit losses, even as interest rates have jumped to more than decade-long highs. Less visible in these numbers is the large volume of businesses and borrowers that have been unable to secure a loan from a bank and forced to pay a premium elsewhere or go to the financial fringes to secure credit.
The conservatism is also grounded in regulation. The past four years alone has seen an additional 1175 new pages of laws and regulations governing bank executive accountability, conduct, and product distribution and sales.
The heavy regulation represents a massive cost and this is resetting bank profits. The cost is hurting smaller banks harder and acts as a competitive restraint. Indeed, mounting regulation has been a large part of the motivation for Suncorp to offload its regional bank to ANZ.
As one former senior banker points out, Hayne represented the start of “the long goodbye for shareholders”.
No more wealth
Five years on, however, Australia’s big banks are in a better place without the distractions of wealth management. Their profits are still rising and they are among the safest in the world. This was evident when Australian banks led the charge back into global funding markets that were on edge following the collapse of US lender Silicon Valley bank. Technology too is reshaping the banking industry with most interactions now taking place through a smartphone. Hayne was largely silent on that.
In contrast, wealth management – which takes in financial advice and product manufacturing – was left reeling by Hayne. It is an industry still finding its feet.
In many ways this is a sad state; Australia has one of the most sophisticated superannuation schemes in the world but it struggles to find a sustainable business model to deliver financial advice to those who have been able to save for their retirement.
This wealth gap remains the biggest opportunity that has been missed in the years following the Hayne royal commission. Key parts of the Michelle Levy review into financial advice, handed to the Albanese government last year, have yet to be regulated.
Hayne handed in his landmark report to the government on February 1, 2019 and the full version was released three days later by the then treasurer Josh Frydenberg.
There were immediate winners and losers. Some like Commonwealth Bank, which had been linked to much of the excesses, was already well under way with a rebuild. That was thanks to a more potent regulator – the financial crimes watchdog, Austrac, that had triggered the exit of former boss Ian Narev a year earlier. Ironically, on the anniversary of Hayne, Commonwealth Bank under chief executive Matt Comyn this week saw its shares touch a record high.
National Australia Bank’s leadership was sent reeling from the final report with then chief executive Andrew Thorburn and chairman Ken Henry gone weeks later after they were singled out for not having what it takes to fix the bank’s culture.
NAB was found to have been charging fees, despite no service being supplied, on an industrial scale. But, according to Hayne, Thorburn sought to put this down to the product of poor systems and carelessness.
It was, in the bank CEO’s words, “just professional negligence”.
After both Henry and Thorburn gave evidence, Hayne declared: “I am not as confident as I would wish to be that the lessons of the past have been learned.”
It was damning criticism to be sure and set off another wave of turmoil for the lender. However, it paved the way for NAB – one of the most accident prone of the Australian banks of the past two decades – to finally get serious about installing an experienced leadership to tackle its deeper structural issues.
So far the combination of Phil Chronican as chairman and ex-RBS banker Ross McEwan as chief executive has delivered three years of stability, a clearer customer mandate, and a bank that is also winning back respect from shareholders.
Power imbalance
One of the big lessons from Hayne was the asymmetry of power and information between banks, wealth managers and advisers, and their customers. Indeed this could apply to most businesses – from big tech, to airlines and even telcos.
Hayne concluded that in almost every case, bad conduct in banks was driven by a combination of the relentless pursuit of profit and also individual gain be it either commissions, bonuses or profit sharing.
“Providing a service to customers was relegated to second place,” Hayne concluded. “Sales became all important.
“Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers.”
Hayne found that incentives, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards.
“Rewards have been paid regardless of whether the person rewarded should have done what they did,” Hayne said.
Commissions have so far been stamped out in most places except areas of life insurance and mortgage broking.
This has allowed mortgage broking to thrive in Australia.
Hayne had also delivered much needed examination into the role of the regulators as the last line of defence to protect customers.
Financial regulator ASIC was torn apart for its defensive instinct and its approach to strike a deal first and litigate as the last resort. The regulator was ordered to turn this culture around; it should start with the question: “Why not litigate?”. This process is ongoing.
Hanye forced prudential regulator APRA to finally confront its mandate. Until Hayne it had been a reluctant conduct regulator of banks and super funds.
Hayne argued ASIC was the natural regulator to oversee the behaviour of super funds when it came to consumers. This required a new framework for the two regulators – that had perpetually been locked in a turf war – to work together in oversight of superannuation. This would reinforce the “Twin Peaks” model of regulation over superannuation.
In assessing the impact of Hayne, the royal commission was indeed ugly and necessary.
It was sensational and it uncovered a rogues gallery of financial villains from crooked financial advisers as well as some unlikely heroes, including the commission’s legal counsel putting the heat on hapless executives.
The banking industry is more customer focused for it. The next step is getting the balance right between heavy regulation and innovation.
Much too needs to be done in financial advice. This is so it is affordable and customers can be confident their best interests are being looked after. But it needs to be a sustainable business for those who are doing the right thing and not just be the domain of the wealthy. That’s the long-term challenge Hayne has left us with.
johnstone@theaustralian.com.au
Originally published as Banking shake-up: The big lessons from the Hayne royal commission
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