Kenneth Hayne issued a ferocious interim report from the financial services royal commission on Friday afternoon, targeting Australia’s biggest financial institutions and the two key regulators, ASIC and APRA. Here are the highlights.

Consumer lending

Hayne finds the banks “had done, and were doing, as little as they thought they have needed to do to meet their legal obligations… there had been occasions when profit has been allowed to trump compliance with the law, and many more occasions where profit trumped doing the right thing by customers.” A key issue here was not merely the inappropriate lending practices of the banks but a general confusion as to whose interests intermediaries such as mortgage brokers were acting.

Financial advice

The recurring issues in financial advice, Hayne says, were “dishonesty and greed”. Describing early financial planning scandals, he notes “regulatory responses, however, focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry. Those responses largely set the tone for future approaches to misconduct…” That criticism also applies to banks themselves, who treated incidents as “a few bad apples”. Hayne is dismissive of that approach, saying:

That generally similar conduct occurred in all of the major entities suggests that the conduct cannot be explained as ‘a few bad apples’. That characterisation serves to contain allegations of misconduct and distance the entity from responsibility. It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity.

The report makes clear that Hayne’s view is there is no justification for the retention of any commissions for advisers, and all “grandfathered” commission not wiped out by the Future of Financial Advice reforms should now be removed.

He then itemises the admitted instances of fee for no service, inappropriate advice and misconduct by advisers. On fees for no service, the big banks, AMP and financial services companies “treated the provision of ongoing services as a matter of no concern to them” when there were contracts for ongoing advice. Advisers “treated ongoing service arrangements as though they were nothing but trail commissions for the advice that had already been given.” Clients couldn’t complain “because the fees they paid were charged invisibly.” Licensees “had neither the systems nor the processes to know whether their authorised representatives were delivering what had been promised.”

This was, Hayne says, “conduct that ignored the most basic standards of honesty” for which no one has been punished. And when advisers have ripped off clients or provided demonstrably bad advice, ASIC almost never took steps beyond seeking to ban advisers, and never used its civil penalty powers. That prompts Hayne to wonder whether the current licensing system — in which companies are licensed, not individuals — should be abandoned.

SMEs and agriculture

Hayne raises the possibility of bringing small and medium business lending under consumer financial services protections. On the vexed issue of guarantors, he in effect calls for suggestions, asking “is there some additional requirement that must be shown to have been met before the guarantee was given if it is to be an enforceable undertaking? Should lenders give potential guarantors more information…?”

Hayne goes on to dismiss conspiracy theories peddled by the likes of Rod Culleton over the Commonwealth’s acquisition of Bank West and its subsequent treatment of Bank West lenders, and struggles to find any systemic issues in relation to agricultural lending, ending the agricultural lending section wondering “is any regulatory change necessary or desirable?”. 

Regulatory failure

Why did ASIC fail so badly? Faced with misconduct, “ASIC’s starting point appears to have been: How can this be resolved by agreement? This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed.” ASIC, he says, has “a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing.”

But Hayne is unwilling to recommend dramatic new powers for ASIC to enforce, instead flagging that ASIC may have too much on its plate and that some of its regulatory functions could be moved elsewhere — although he doesn’t mention the obvious candidate, the ACCC.

Above all, for Hayne, it is remuneration that is at the heart of the misconduct he has uncovered. “The culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies.” At this point, however, Hayne hasn’t advanced any solutions — that will have to await the final report next year. That perhaps explains why bank stocks were rising on the share market this afternoon. There’s nothing to fear from Hayne – yet.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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