The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released on 4 February 2019.

The report is bleak: it makes uncomfortable reading for anyone who participates in the sector. The report concludes that conduct by financial services entities “over many years” has caused substantial loss to consumers, while driving profit for the sector. That conduct has “very often” broken the law, and where it hasn’t it has fallen short of the conduct the community legitimately expects from the sector.

Key recommendations

The report contains a total of 76 recommendations. The recommendations are generally principles-based and not as far reaching as some had predicted (for example, the vertical integration of product manufacture and sale / advice was not banned, despite being heavily criticised). However, it is inevitable that fundamental change will follow. As the report says:

Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened.

The Australian Government has agreed to take action on all recommendations, and has announced an AU$30 million compensation scheme of last resort for victims of misconduct by financial institutions that no longer exist.

Some of the Commission’s key recommendations are as follows:

Banking

• Borrowers, not lenders, should pay for mortgage brokers (with commissions for mortgage brokers being banned over a period of two to three years). This is the one main recommendation that appears may not be fully implemented.

• Banks would be barred from charging dishonour fees on basic accounts, or from providing informal overdrafts on basic accounts without express agreement.

• Imposing a duty on mortgage brokers to act in the best interests of borrowers, with civil penalties for breaching that duty.

• Making mortgage brokers subject to the same rules that apply to financial advisers providing personal financial advice.

Insurance

• Replacing the insured’s duty of disclosure with a duty to take reasonable care not to make a misrepresentation

• Limiting an insurer’s ability to avoid a life insurance contract for non-disclosure or misrepresentation to circumstances where the insurer can show they would not have entered the contract on any terms.

• Banning unsolicited sales (hawking) of insurance products.

• Making insurance contracts subject to the unfair contract terms rules.

• Bringing the handling and settlement of insurance claims within the definition of ‘financial service’.

Financial advice

• Mandatory annual reviews of all ongoing fee arrangements by clients.

• Mandatory disclosure of a lack of independence by financial advisers, where relevant.

• Repealing all grandfathered provisions allowing commissions.

• Removing commissions on life insurance, unless there is clear justification for retaining them (at present these are permitted in Australia, but subject to legislated maximum amounts).

• Reviewing the exemption for general and consumer credit commissions from the ban on conflicted remuneration.

• Making all financial advisers who provide financial advice to retail clients subject to a single disciplinary body.

Superannuation

• Prohibiting superannuation trustees from assuming any obligations other than those arising out of their duties as trustees of a particular fund.

• Prohibiting the deduction of advice fees from MySuper accounts.

• Banning unsolicited sales (hawking) of superannuation.

• Limited each person to only one default superannuation account (this is already the position in New Zealand).

• Banning superannuation trustees from “treating” employers to have their fund nominated as the default fund.

• Extending the banking executive accountability regime to superannuation trustees.

Culture, governance and remuneration

• Financial services entities must assess culture and governance, identify and deal with problems and evaluate the effectiveness of changes made.

• APRA should build a supervisory programme focused on building culture that will mitigate the risk of misconduct and use a risk-based approach to its reviews.

• Banks should fully implement the recommendations of the Sedgwick Review.

Regulators

• Retaining the ‘twin peaks’ model of financial regulation, with ASIC remaining responsible for conduct and disclosure regulation and APRA remaining responsible for prudential regulation (which is largely the same model as used in New Zealand).

• Endorsing ASIC’s new “why not litigate” approach to enforcement which takes, as its starting point, the question of whether a court should determine the consequences of contravention.

• Imposing statutory obligations on ASIC and APRA to cooperate, share information and notify breaches (something New Zealand’s regulators already do well).

• Establishing an independent oversight authority for ASIC and APRA to assess the effectiveness of each regulator.

The New Zealand Government has said that it will consider the recommendations. Not all of the recommendations are directly relevant in New Zealand, but if all relevant recommendations are adopted here there would be fundamental change in some areas. Financial advisers and mortgage brokers would be among the most seriously affected, but there would be change across the board.

Get in touch!

Anthony Harper’s specialist financial services team has extensive experience in culture and conduct issues, and are actively supporting clients across the financial services sector on these issues. If you have any questions, or need assistance in your business, please get in touch.