Banking royal commission’s bombshell report: The key recommendations

The long-awaited final report of the banking royal commission has recommended sweeping changes to address the root causes of poor behaviour in the industry.

The long-awaited final report of the banking royal commission has recommended sweeping changes to address the root causes of poor behaviour in the scandal-plagued sector and criminal penalties for those caught doing the wrong thing.

Treasurer Josh Frydenberg says the government has agreed to take action on all 76 recommendations handed down by Commissioner Kenneth Hayne QC on Monday, with a focus on “restoring trust” in the financial system while maintaining the flow of credit.

Releasing the report this afternoon, Mr Frydenberg gave a scathing review of the banking sector, saying it “must change and change forever”.

Speaking from Parliament House, the Treasurer described the financial institutions’ actions as “driven by greed and behaviour that was in breach of existing law and fell well below community expectations”.

“The price paid by our community for this misconduct is immense, and goes beyond just the financial,” he said.

But the question on everyone’s lips — is anyone going to jail? — remains unanswered, with Mr Hayne failing to make any referrals to the Commonwealth Director of Public Prosecutions and only two referrals to the corporate watchdog for possible criminal offences.

Here are some of the key takeaways from the mammoth report:

INSURANCE

• Sales of dodgy funeral insurance products will be brought to an end, with the commission recommending they lose their current exclusion from the definition of ‘financial product’.

The commission heard how vulnerable consumers, including people with disabilities or those living in Aboriginal and Torres Strait Islander communities, were sold expensive funeral insurance policies by unscrupulous telemarketers.

Funeral insurance policies are currently carved out from the definition of ‘financial product’ in the Corporations Act, meaning providers of funeral expenses policies are not required to hold financial services licences and are not subject to “anti-hawking” laws.

• Junk insurance products pushed by car dealers using high-pressure sales tactics will face a “handbrake” via a proposed deferred sales model, which will prevent consumers from being strongarmed by “inserting a pause into the sales process”.

The commission recommends Treasury develop an industry-wide model for deferred sales of any add-on insurance products, which should then be “implemented as soon as is reasonably practicable”.

It also recommends a cap on commissions to be paid to vehicle dealers for selling add-on insurance. The ABA’s updated Code of Banking Practice already includes a deferred sales model for consumer credit insurance for credit cards and personal loans sold in branches or over the phone.

The big four banks. Picture: AAP

REGULATORS

• Australia’s corporate watchdog, the Australian Securities and Investments Commission, has been lambasted for its past unwillingness to prosecute misconduct but has avoided any major structural changes, for now.

“In my view the enforcement culture of ASIC, not the size of ASIC’s remit, should be the focus of change,” Mr Hayne said.

ASIC has been ordered to overhaul its approach to enforcement by considering “as its starting point” whether a court should determine the consequences of a contravention and limiting its reliance on infringement notices.

“The history of what has become known as the fees for no service issue demonstrates, in the clearest possible way, the need for visible public denunciation and punishment in deterring misconduct,” Mr Hayne said.

• The Australian Prudential Regulation Authority, the other half of the “twin peaks” regulator model, has been ordered to keep a closer watch on executive pay in the banking sector.

The commission wants APRA to revise its standards and guidance for remuneration systems to give more attention to structuring incentives in a way that reduces the risk of misconduct.

• While stopping short of recommending any “radical change” to Australia’s so-called “twin peaks” regulatory model, Mr Hayne said he had seriously considered calling for the creation of a new agency to take over ASIC’s civil litigation responsibilities.

“Although I do not now recommend the establishment of a specialist civil enforcement agency, ASIC’s progress in reforming its enforcement function should be closely monitored,” he said.

“If, over the coming years, it becomes apparent that ASIC is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability, further consideration should be given to developing a specialist agency of the type I have described.”

BANKING

• When customers make use of a mortgage broker, they expect the broker to be acting in their best interests. But at the moment, that is not necessarily the case. Often brokers are paid fees by lenders, giving them a perverse financial incentive to work against the borrower’s interests.

Mr Hayne’s recommendations will change the law to require brokers to act in the best interests of borrowers — not lenders, or indeed themselves. Any brokers who breach that obligation will face a civil penalty.

And on top of that, brokers will be paid by the borrower, not the lender, after a transition period of two or three years.

• Banking customers who live in remote areas, or who aren’t adept at speaking English, often struggle. Mr Hayne’s changes will require banks to work with those customers to identify “a suitable way” for them to access and undertake their banking.

Banks will not be able to allow informal overdrafts on basic accounts without a customer’s prior agreement, and will no longer charge dishonour fees on basic accounts.

• Mr Hayne says the Banking Code’s definition of “small business” should be changed to apply to any business with fewer than 100 full-time equivalent employees, if the loan being applied for is less than $5 million.

• There are also several recommendations designed to help farmers, including the creation of a national scheme for farm debt mediation, better valuation of agricultural land, and restrictions on banks charging default interest on loans when land is affected by a natural disaster, such as drought.

• The last, crucial change is that the industry codes of conduct, which need to be approved by ASIC, will include “enforceable code provisions”. A breach of any such provision will constitute a breach of the law.

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg. Picture: Kym Smith

FINANCIAL ADVICE

• The report recommends amending the law to say ongoing fee arrangements must be renewed every year by the client. And each year, there will be a record in writing of the services the client will be entitled to receive and the total fees they will be charged.

• The government, in consultation with ASIC, will review the effectiveness of measures that have been implemented to improve the quality of financial advice. This review must be completed by December 31, 2022.

• The report argues that as long as financial advisers stand to benefit financially from their clients acting on their advice, they have a clear conflict of interest.

It recommends repealing grandfathering provisions for conflicted remuneration as soon as practicable, and asks the government to consider whether the remaining exemptions to the existing ban on conflicted remuneration — such as the exemption for general insurance products — are still justified.

• All holders of an Australian Financial Services Licence will need to be more proactive when they detect that a financial adviser has engaged in misconduct. The changes will require them to “make whatever inquiries are reasonably necessary” to determine the extent of the misconduct, then tell the affected clients and remediate them.

Mr Hayne also calls for a new, single disciplinary body for financial advisers, which would allow clients and other stakeholders to report information about their conduct.

SUPERANNUATION

• The key recommendation for super is that each person should be “stapled” to a single default superannuation account.

At the moment, workers who move from job to job often get a new super account each time, along with a bunch of new fees. This change would essentially roll all those separate accounts into one.

It’s a problem that especially affects employees who are young and working part-time, who tend to make less informed choices about their super.

• Mr Hayne also recommends prohibiting the hawking — in other words, the unsolicited offer or sale — of superannuation. Offers made under an eligible employee share scheme would be exempted from the ban.

“The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited, unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer or that kind of products,” he says.

GOVERNMENT RESPONDS: BANKS HAVE ‘BROKEN LIVES AND BUSINESSES’

After the report’s release, the Treasurer noted emotional stress caused by financial institutions had “broken lives and businesses”.

Mr Frydenberg cited the charging of dead people, the sale of knowingly worthless insurance policies, and the shocking audio reporting of a 26-year-old man with Down syndrome being convinced to make unnecessary purchases.

“This is why the community’s trust in our financial institutions has been lost, and this is why it must be restored,” he said.

“My message to the financial institutions is that this conduct must end.

“Consumers must be treated honestly and fairly. My message to the Australian community today is that your government is committed to making this happen.”

Mr Frydenberg said that in taking action on the report’s 76 recommendations, the government would put in place legislative framework that “provides regulators with the powers and resources to hold those who abuse our trust to account”.

“If nothing else, the public is entitled to expect that the law is applied and enforced,” he said.

With regards to mortgage brokers, Mr Frydenberg announced a “best interest duty” banning trailing commissions and volume-based bonuses on new loans, to be effective from 1 July 2020.

He also announced an end to the “grandfathering of conflicted remuneration for financial advisers”, effective from January 1, 2021.

In terms of superannuation, he said fund members will only have one account for new members entering the system.

The government is also prohibiting the deduction of advice fees from MySuper accounts.

Vulnerable consumers will be protected through clarifying and strengthening the unsolicited selling provisions, including for super and insurance products.

Among the Treasurer’s other announcements was the establishment of a comprehensive national scheme for farm debt mediation, support for the elimination of default interest on natural disaster-impacted loans, and the extension of the jurisdiction of the federal court to cover corporate and criminal misconduct.

“This will expedite cases that are currently heard before state courts and commonly take over two years to be heard,” he said of the extension.

Mr Frydenberg said the government will provide full mediation for consumers harmed by misconduct.

“For the first time, the government is establishing a compensation scheme of last resort,” he said.

“We will expand the remit of the Australian financial complaints authority... so they can award compensation for successful claims going back a decade.”

‘WILL THE GOVERNMENT APOLOGISE?’

Mr Frydenberg was asked twice about the Morrison government’s opposition to the royal commission for 16 months. Both times, he responded by criticising Labor.

“We could debate for hours the failures when Labor was last in office, not forgetting that... and I recall Bill Shorten saying how fantastic the sector was when he was the minister for the sector.

“But he didn’t call a royal commission or take action to bring these big banks to account. He didn’t put in place new standards which we have announced today, and have been doing since the financial systems inquiry was initiated by this government when we first came into power in 2013.”

Asked again if he would apologise to the Australian public for voting against the commission 26 times, the Treasurer said: “Let me be very clear: the government is now acting on all 76 recommendations, and we are even going further in some respects.

“We can debate for hours Labor’s failures when they were last in opposition. It has been the Coalition that has commissioned the royal commission and the Coalition that today is announcing the recommendations.”