It’s time to speak truly … and carry a big stick

Commissioner Kenneth Hayne. Picture: David Geraghty

With the benefit of hindsight, it’s clear the Coalition government was wrong to oppose the establishment of a royal commission into financial services. The key issue now is how the government reacts to the findings, some of which were outlined in the interim report released yesterday.

Of course, many people have known for a long time that there is plenty of bad behaviour among the banks, financial planners, insurers and superannuation providers, but by putting meat on the bones with specific examples, the royal commission has, for this reason alone, been a worthwhile if depressing exercise.

At heart, the commissioner, Kenneth Hayne, is arguing that a combination of greed and slack regulation has allowed too many people who work in the financial services industry to cheat, defraud, con and abuse customers.

Even in the better cases, too many customers receive poor value-for-money services.

As I have argued before, the incompetence and idleness of the regulators stand out as a major part of the problem. As the interim report notes: “Banks decided when and how laws would be obeyed.”

Too often the Australian Securities & Investments Commission, which is responsible for enforcing standards of conduct, has resorted to the lame remedies of infringement notices or enforceable undertakings, rarely taking matters to court. The Australian Prudential Regulation Authority has never taken a matter to court.

It is heartening to read Hayne’s scepticism about adding “an extra layer of legal complexity to an already complex regulatory regime”.

“What would that gain?” he asks.

The point is, the regulators don’t make anywhere near full use of the laws that exist. The option of simplifying the laws is canvassed in the interim report.

A major challenge for the government is how the regulators’ performance can be improved. There will need to be major personnel changes, including in the most senior positions. Rather than being afraid of imposing the most extreme penalties, including the potential for jail terms, the regulators need to demonstrate they can truly act as tough cops on the beat.

The potential for jail terms is more likely to focus the minds of executives than the imposition of fines ultimately paid by shareholders and customers.

Financial services firms also need to rethink their strategies and accept that providing excellent and appropriate services to customers is actually the best way to achieve sustainable and acceptable returns for shareholders.

Firms also need to give some consideration to the appropriate combination of services and activities they undertake.

Many more resources will need to be devoted to compliance and checking customer service delivery at the individual level. Surveys of customer satisfaction have been widely misused within the industry.

The use of commissions and bonuses needs to be rethought and trailing commissions should be abandoned as quickly as possible. And, let’s face it, voluntary codes of conduct are a joke and should either be made compulsory or the force of law should be imposed.

There is no reason for banks and other firms to wait: they need to get on with bringing about needed changes now. The same applies to the regulators. Josh Frydenberg should be making this point forcefully.