SYDNEY: Australia’s financial industry faces tougher regulation and more scrutiny of pay and culture after the government accepted key recommendations from a yearlong inquiry into decades of scandals and misconduct.
The Royal Commission, however, stopped short of recommending financial firms be broken up to stop them offering advice and wealth management, despite conflicts of interest that were at the heart of much of the wrongdoing.
The government said it will take action on all 76 recommendations, including creating a new disciplinary system for financial advisers, tasking the prudential regulator with oversight of remuneration and encouraging the securities regulator to take more court action against wrongdoers.
The damage arising from misconduct “to individuals and the overall health and reputation of the financial services industry has been large,’’ Commissioner Kenneth Hayne said in the three-volume report released in Canberra Monday. “Saying sorry and promising not to do it again has not prevented recurrence. The financial services industry is too important to the economy to allow what has happened in the past to continue or happen again.’’
Treasurer Josh Frydenberg said the interests of consumers must now come first. “From today the sector must change, and change forever,’’ he said.
During 68 days of hearings, and in more than 10,000 public submissions, the inquiry exposed a laundry list of misconduct, from charging dead people for services, lying to regulators, and pushing people into poorly-performing products to meet bonus targets.
The inquiry has already started to reshape the industry. Most of the big-four banks are looking to sell their financial planning units, where most of the problems occurred; have tightened lending criteria, and cut fees. The CEO and chairman of wealth manager AMP quit, while National Australia Bank overhauled its executive team and pay structure.
The fallout has also hit investors, with the big-four banks — which account for 22% of the benchmark index — losing a combined A$64 billion (US$46.4 billion) in market value since the inquiry was announced. Shares of AMP, whose reputation was shredded during the hearings, have plummeted more than 55% in the past year amid plunging earnings and spiraling remediation costs.
Hayne’s report made recommendations across the following key areas:
In relieving news for the likes of AMP and IOOF, Hayne stopped short of recommending financial firms be forcibly broken up.
“Enforced separation of product and advice would be a very large step to take,’’ he wrote. “It would be both costly and disruptive. I am not persuaded that it is necessary to mandate structural separation between products and advice.’’
Pay & Culture
Hayne identified salary and incentives structures as the root cause of the much of the wrongdoing.
“Rewarding misconduct is wrong,’’ he wrote. “Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards.’’
Recognising the difficulty of mandating changes to pay, he has recommended the Australian Prudential Regulation Authority “increase the intensity’’ of its supervision of how financial firms implement their pay structures, taking into account misconduct, compliance and other non-financial risk.
Limits should be set on the use of financial metrics when setting long-term bonuses, and financial companies should review remuneration systems for frontline staff at least once a year to focus “on not only what staff do, but how they do it.’’
Hayne has also put the onus on financial firms to clean up cultural problems, recommending they should assess culture and governance, deal with problems, and determine whether the changes made have been effective.
Hayne directed some of his sharpest criticism at the regulators, saying too often lawbreakers were not properly held to account. Rather than seek to negotiate settlements, the securities regulator should first ask whether a court should determine the consequences of a contravention, he said. The Federal Court will be given greater jurisdiction over corporate crime to make it easier for ASIC to launch legal proceedings.
“Misconduct, especially misconduct that yields profit, is not deterred by requiring those who have found to have done wrong to no more than pay compensation. And wrongdoing is not denounced by issuing a media release,’’ he said.
While Hayne recommended against stripping ASIC of any of its powers, the government has agreed to his suggestion to create an independently-chaired regulatory oversight body.
Mortgage-Broking and Financial Advice
Mortgage brokers and financial advisers have taken a big hit to their earnings potential. Hayne has recommended laws be amended so that mortgage brokers must act in the best interest of borrowers, and that the borrower, not the lender, should pay the broker a fee, putting an end to a lucrative web of commissions.
To avoid the fees-for-no-service scandals, Hayne said laws should be introduced to ensure fee arrangements are renewed annually by the client, who must also get a written statement of the services provided and fees charged. A new disciplinary system will also be set up for financial advisers, including a central disciplinary body.
“The financial advice industry is partway through a transformation from an industry dedicated to the sale of financial products to a profession concerned with the provision of financial advice,’’ Hayne wrote. “That will not be an easy task. It will require taking steps to deal with those involved in the charging of fees for no service and to ensure it doesn’t happen again, reducing the conflicts of interest that pervade the industry, and introducing a coherent, credible disciplinary system.’’