A consumer's guide to the banking royal commission's final report

Why did it happen? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty… But it is necessary then to go behind the particular events and ask how and why they came about. Kenneth Hayne, Royal Commission Interim Report.

In his first report from the royal commission, Kenneth Hayne dropped a bombshell when he unflinchingly called the banks out for the greed that drove their gamut of misconduct.

Commissioner Kenneth Hayne arriving at the Banking Royal Commission.Credit: Brook Mitchell

Now the true reckoning for Australia’s financial institutions looms as the government prepares to receive Hayne’s final report on Friday.

Beginning its 68 days of public hearings on February 12 last year, the royal commission hosted 134 witnesses – both customers and bank executives. Supporting this evidence was 400 witness statements and more than 6,500 exhibits. The conduct of 45 entities was examined.

Too often it was an ugly sight as the callous harshness of the banks was juxtaposed against the customers who (often tearfully) spoke of their suffering.

It’s hard to imagine that Hayne will do anything other than hit the banks and the soft-touch regulators that have allowed their misconduct to flourish hard.

Already the opposition has pledged to implement all of the commission’s recommendations while the government is taking a more cautious approach and will wait until receiving the report before making a commitment to back the whole report – though it is expected to back the majority of Hayne’s final recommendations.

Hayne's final report could have profound ramifications on the superannuation industry, particularly on bank run super funds, the financial planning sector, insurers and, of course, consumers who might find financial products more costly or harder to get.

It's a lot to cover. So to help we've gone through what recommendations Hayne might make in his final report and how those might reshape, restructure or even revolutionise the banking sector.

Australian Securities & Investments Commission chairman James Shipton (left) and the regulator's chief legal officer Chris Savundra. Credit: AAP

Regulators under scrutiny

Mount up. This could be the big one after both the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA) were found wanting during the commission.

One of the issues Hayne has grappled with is whether it’s the law or the regulators’ lack of enforcement of the law that’s at issue. From his interim report, it appears Hayne thinks it’s the latter.

So expect Hayne to recommend that ASIC and APRA be subjected to official performance reviews where they will be assessed next to their mandate. Both ASIC and APRA could be stripped of some of their powers, and this could result in a new regulator being formed to cover some parts of financial services.

But will the law be changed? ASIC is very keen for a key tenet of the Corporations Act – that financial services act fairly, honestly and efficiently – carry a penalty as it currently does not.

Some sources have suggested Hayne will recommend a new overarching law that would be akin to the tax act where any attempt to avoid paying tax is a breach.

This could mean a bank attempting to mislead or deceive would be a breach of the law. But Hayne has also called the current laws governing the sector "labyrinthine" so new laws are unlikely.

Even still, unravelling the Corporations Act would be quite the legacy for Hayne.

Super shake-up

Australia’s $2.7 trillion plus superannuation industry looks set for a major shake-up. At least a dozen super funds -- the majority bank-owned -- may have committed misconduct or breached laws.

The evidence from the sector was grim. NAB allegedly failed to notify the regulator of breaches within the 10-day timeframe. CBA failed to move 13,000 super funds to the no-frills MySuper accounts by the deadline. NAB, CBA and AMP were all revealed to have put their interests over fund members.

Super industry watchdogs - APRA and ASIC - were slammed for their failure to police the sector.

APRA was censured for never taking a single bank, insurance company or super fund to court in enforcement action.

ASIC was criticised for its reluctance to prosecute banks for breaching their requirement to tell the regulator of unlawful behaviour within 10 days.

The commission also heard evidence about underperforming super funds, particularly low-cost MySuper products.

Expect extensive legislative and regulatory changes, including higher fines for misconduct and more stringent oversight.

The role and power of regulators APRA and ASIC are likely to be clearly and distinctly defined and they are likely to to be given a sharper set of enforcement teeth.

Underperforming funds are likely to be removed from the industry and workers would not be switched to new funds when they change jobs.

There could also be fines for funds that do not act in the best interests of members.

Home loans and consumer finance

Banks have already tightened the screws on home loan customers over the past few years. A key question is whether the royal commission will take this process even further.

The $1.6 trillion mortgage market is the biggest source of loans for banks, but the hearings on home loans raised serious doubts over whether the banks were complying with responsible lending laws.

In particular, the commission appeared concerned banks were not going far enough to investigate borrowers' living expenses, instead relying on statistical benchmarks as a proxy for the household budgets.

In response, banks have required customers to provide more detail about their living expenses when applying for loans, and are promising to cut their use of such benchmarks.

But one of the critical questions will be whether commissioner Hayne wants banks to use the standardised measure for expenses (known as the HEM) at all or whether they must make further inquiries before lending out money.

Mortgage brokers, who arrange more than half of all new home loans, are also sweating on commissioner Hayne's findings.

There is a question mark over whether Hayne might recommend a shake-up to the commission-based remuneration model, after probing different models, including one where banks pay for service, instead of a commission.

The commission heard that Commonwealth Bank looked into wiping out commissions altogether, which it said would have saved customers money, but it opted against the move because doing so might have cost the bank business.

Brokers point out, however, CBA would have the most to gain by abolishing commissions because it has the largest branch network, and branches would become a more important way of gaining customers.

Insurer boiler rooms on notice

The royal commission's public hearings on insurance saw companies admit to a litany of misconduct, including wrongly knocking back claims, using boiler-room tactics to sell policies that were of dubious value, and relying on outdated medical definitions.

In response, the commission is expected to reach a conclusion on whether the sale of insurance - and the claims handling by insurers - should be subject to more regulation.

Some of the changes could be outright bans on certain activities. The commission exposed the pressure tactics used by life insurance companies to sell their cover by cold-calling people, a practice that had already attracted criticism from ASIC.

Commissioner Hayne may reach a verdict on whether some of these sales tactics, such as cold-calling should simply be outlawed altogether.

The industry may also lose some of the carve-outs that have meant insurance is excluded from some laws that apply to other financial services businesses.

At the moment, insurance claims handling is self-regulated by the industry, but given the serious problems uncovered, Hayne may think this should be policed by ASIC.

Insurers also expect Hayne will come down in favour of extending unfair contract laws across the industry, which currently has an exemption.

Banker bonuses

As the commission has revealed more poor behaviour over the past year, a recurring theme has been that bankers all-too-often stood to gain financially from misconduct. In many cases, this was because of remuneration schemes that gave finance workers the incentive to put profits before people.

There was the insurance company that offered a trip to Las Vegas for selling the most funeral insurance, a rogue banker who had previously won a trip to Hayman Island for blitzing salkes targets, and tales of financial advisers giving inappropriate advice to boost revenue and get a bonus.

Higher up the corporate ladder, the commission also heard testimony from Commonwealth Bank chairman Catherine Livingstone that a previous review of executive pay had been "plainly inadequate."

Banks have already cut back on sales targets by instead judging their staff on "balanced scorecards," but commissioner Hayne's interim report suggested this was not enough.

His final report may deal with whether these sorts of incentives are needed at all, and whether regulation of banker pay is warranted. His recommendations may potentially have an impact on pay packets from the branch teller to the chief executive.

Given all the problems caused by the incentives given to finance workers, Hayne's interim report questioned whether staff who deal with customers should be given "variable" incentives at all.

"If more junior employees should not be remunerated in this way, why should their managers and senior executives?" the report said.

Financial Planning

The fallout from the royal commission will change the financial planning industry forever.

The commission heard wealth managers acted to benefit financial advisers, including maintaining grandfathered commissions, without considering whether the super fund trustee was legally required to stop paying them.

Members’ accounts were charged ongoing adviser fees, without adequate systems in place to assess if services were being provided.

AMP admitted it lied to the regulator 20 times about the scale of the problem. Not to be outdone, CBA was revealed to have charged fees to thousands of customers who had died.

NAB was quizzed on the rampant false witnessing of documents on behalf of 2520 NAB financial planning clients.

On a result you should expect higher fines for misconduct, more stringent regulation and a huge wave of remediation costs.

The big four banks have already allotted $2.5 billion for compensation and wealth manager AMP could have to pay $1.5 billion and IOOF $780 million over the next four years.

Recommendations will likely spell the death knell for almost all forms of commissions. The vertically integrated business model will likely be substantially diminished or even banned.

The industry watchdog and its activities will be much stronger, and it is likely to have oversight and monitoring of all licences, rather than primarily the large institutional dealer groups as has been the case in the past.

Small business

Few are expecting sweeping reforms for small business lending from Hayne’s final report amid fears that tightened regulation could turn off the funding tap to one of the most vital sectors of the economy.

But the interim report did float some changes that could have a significant impact on some small business customers and the banks including allowing the new Australian Financial Complaints Authority to award compensation.

Carolyn Flanagan giving evidence at the banking royal commission. Mrs Flanagan lost her home after going guarantor on her daughter's small business.

Another key issue Hayne explored in his interim report is lifting responsible lending requirements for banks by placing small business lending within the reach of the National Consumer Credit Protection Act or asking banks to conduct more detailed analysis of cash flow statements and other business documents before issuing a loan to a small business operator as well as changes to how banks treat guarantors of small business loans.

Farmers and remote communities

The royal commission also spent some delving into how banks treat borrowers in the agricultural sector, fortuitous timing given the drought ravaging parts of Australia.

Hayne might consider changing how and when banks charge default interest on impaired loans particularly following natural disasters and forcing banks to mediate with customers where a farm is used to secure a loan.

The royal commission also looked at some lending practices and the sale of insurance products in remote communities.

Kathy Marika gave evidence at the royal commission about how she didn't want funeral insurance but Let's Insure were "really pushy".Credit: AAP

Hayne pay look to put some curbs on the types of insurance often sold in those areas, notably worthless accident insurance and funeral insurance plans.

Hayne may also look to stop or alter the banking industry’s current practice of garnishing Centrelink payments when a customer on government benefits accesses an overdraft facility.