One year after Hayne: 'Profound' changes for banks, but can they last?

A year of dramatic upheaval for Australia's banks began with a photo opportunity gone wrong. This time last February, banking royal commissioner Kenneth Hayne appeared to underline his independence by refusing a photographer's request to shake Treasurer Josh Frydenberg's hand as he delivered the inquiry's 1100-page final report.

The awkward scene made for a rare lighter moment in the banking royal commission saga. But the consequences of that lengthy report were serious, and they are still being felt today.

Commissioner Kenneth Hayne and Treasurer Josh Frydenberg (right) in February 2019.Credit: AAP

Executives have lost jobs, there has been a flood of lawsuits filed, new laws have passed parliament, and banks have set aside billions for compensating people and cleaning up their act. The landmark report and the inquiry that preceded it also sparked wider discussion on the social function of corporations, the role of regulators, and how senior managers are incentivised to do their jobs.

But will this suite of changes have a lasting impact in cleaning up our scandal-prone banks? Or might the same discussion about bank misconduct rear its head again in five years time?

'Profound changes'

There's little doubt Hayne, a former High Court judge, set off a furious amount of activity in government over the past year.

Of his 76 recommendations, more than two thirds were directed at government or the regulators. Treasurer Frydenberg has a "roadmap" that aims to have 90 per cent of the changes (excluding reviews) in place by the middle of this year. Royal commission-related rules are likely to account for about a quarter of the legislation going through the parliament this year, one government source said.

Professor Ian Ramsay from The University of Melbourne's law school says the changes to law are "profound," and the revelations of misconduct uncovered by Hayne are "transforming." The commission has not only resulted in changes to the law, but emboldened the Australian Securities and Investments Commission (ASIC), and gave impetus to efforts to clean up the industry's "very flawed" culture.

ASIC, criticised by Hayne for being too timid, has in the last year launched several high-profile cases against banks, and there will be more lawsuits to come from a regulator that now asks itself "why not litigate?".

Ramsay also cautions, however, that the sweeping changes did not address all of the problematic aspects of bank culture. For example, it left in place incentive structures such as profit-dependent executive bonuses and some commissions, all of which give bankers the incentive to focus on selling product.

At a fundamental level, he points out banks still face the challenge of "balancing on one hand the relentless search for profits versus the need to look after customers first and foremost".

“That tension has not been resolved by the Hayne royal commission,” Ramsay says.

Commissioner Hayne declined to be interviewed for this story, as he has done since handing in the report. In an email, he said he had decided as the commission was coming to an end that he would "leave the report speak for itself." "And that remains my view even now, one year on," he wrote.

'Perfect storm' for banks

For the banks, the most immediate result of Hayne's final report was to claim two of the most high-profile scalps in the country: former National Australia Bank chief Andrew Thorburn and former chairman Ken Henry.

They joined a list of departures from the preceding year that included former AMP chairman Catherine Brenner, former AMP chief Craig Meller and former National Australia Bank senior executive Andrew Hagger.

Beyond these corporate casualties, bank-watchers say the Hayne commission also had a fundamental impact on how these businesses are run. The banks have made $5.8 billion in provisions for customer remediation, the Australian Banking Association says, fees have been cut, and pay packets re-vamped to emphasise customer service instead of sales. Bankers insist staff are more cautious about approving loans — though Hayne did not actually recommend any changes to responsible lending laws.

"It's triggered a return to genuinely focusing on the customer, and a broader perspective on shared value. Before the royal commission, banks would talk about the importance of customers but act in the short-term interests of shareholders,” says Evans and Partners banking analyst Matthew Wilson.

Wilson notes the royal commission had collided with other major challenges to banks, including the era of ultra-low interest rates and the rise of digital competitors.

"It's a perfect storm in terms of timing. It's highlighted to customers that they should consider alternative providers," he says.

Commonwealth Bank chief executive Matt Comyn this week also acknowledged the lasting impact of the commission on public trust in the sector. "No question that the trust and reputation of the industry has been eroded substantially, so rebuilding that is extremely important."

Yet even frequent critics of the banks concede there have been positive changes.

The chief executive of the Consumer Action Law Centre, Gerard Brody, describes the impact of the Hayne royal commission one year on as “significant” and “meaningful”. While he says incentives paid to some finance workers are still a problem, he commends banks for steps such as stopping the sale of add-on junk insurance – even if this did only come about with heavy pressure from ASIC.

“We’ve been banging on about that for years, but it’s only now, with Hayne in the limelight, that that’s happened,” Brody says.

Can it last?

For all these positive changes, however, there is also scepticism about just how long-lasting the changes will be.

Amid signs of industry "pushback" against some of Hayne's recommendations, former ACCC chairman Graeme Samuel believes the wake-up call effect of the inquiry will last less than a few years. He points to bankers blaming Hayne for slowing down credit growth, and say he's “despondent” about corporate Australia falling back into its old ways.

"I just fear that what we are seeing at the moment is an attitude problem," Samuel says. “We are seeing reports almost daily now of Hayne has caused this problem, Hayne has caused that problem.”

Others fear the political momentum for change could fade over time.

I fear that what we are seeing at the moment is an attitude problem. We are seeing reports almost daily now of Hayne has caused this problem, Hayne has caused that problem.

Former ACCC chairman Graeme Samuel

Another former ACCC chairman, Professor Allan Fels, says the most important legacy of the Hayne commission is “greatly increased community and government awareness of poor banking behaviour“. But he says whether this impact will be lasting is "less clear".

"It’s possible that the issues will fade from public’s mind, and also that public awareness does not necessarily translate into action and change in the system,” Fels says.

Another worry is that bank lobbying could water down or stop changes, as occurred when the government backflipped on its initial support for Hayne's call to upend mortgage broker commissions. Fiona Guthrie, chief executive of Financial Counselling Australia, said there had been "enormous" changes in past year, but she was more pessimistic because of the temptation to focus on the short term and maximise profits.

Confronted with such scepticism, CBA's Matt Comyn says the industry needs to keep the pressure on itself to make the changes long-lasting.

"It is really important that we keep up the pressure on ourselves to keep pushing forward so that we’re sitting here in two, three, five years time, and not only do we have a strong and stable financial system, but we’ve also got one that we are all proud of and customers increasingly say the banking system does a really good job,” Comyn said.

Whether or not you subscribe to Comyn's optimism, most would agree the Hayne inquiry has unleashed fairly major changes. But its long-term legacy remains up for debate.

If there is one thing that bankers and critics alike can agree on, it's that the industry still has a long way to go in rebuilding its reputation and regaining the public's trust.