Finally, Australia’s big bankers can relax for a little while as their time of giving evidence before the Hayne Royal Commission comes to an end.
However, the relief will very short lived because while they are taking a short break from making apologies and enduring withering cross examinations, Commissioner Hayne will be busily preparing his final recommendations which are likely to change the way banking and investment happens in Australia from now on.
While we will need to wait until February for the Royal Commission findings to land and following that for a political solution, there are some areas which are sure to be changing.
No more fees for no purpose
One of the most consistent themes throughout the Commission and across banks and the large investment groups has been the charging of fees for no service.
Whether it is financial advice that was never given or fees for other obscure purposes it was clearly one of the sore points from the Royal Commission and one way or another it is set to stop.
While most of the banks and financial services companies were excellent at charging fees, they also proved to absolutely hopeless at paying them back.
There are a million excuses but I doubt the Royal Commissioner is going to be happy for the status quo to remain with “poor records’’, being the modern equivalent of the old “dog ate my homework’’ excuse.
Surely if these large organisations can collect millions in unjustified fees, they should be able to identify those charged unjustly and pay them back without it taking many years.
No more useless products
You could be forgiven for thinking that we Australians are absolute mugs from this Royal Commission – either that or the big financial service companies are really good at selling us useless nonsense.
Junk like credit card insurance was sold everywhere along with all sorts of inappropriate, expensive, unwanted and poorly targeted insurance within superannuation.
Then there is charging the wrong interest rates on home or other loans and in all of these cases struggling to recognise the mistake or compensate customers even years later.
Of course, it doesn’t help when some of those customers were dead at the time they were charged!
Know your customer and serve them
Many of the problems brought before the Royal Commission showed there had been a lot more effort put into designing products than actually finding out what customers needed and wanted.
So customers were shoehorned into products that were incredibly wrong for them and terrible value.
That’s not how traditional banking is meant to work, although when financial services are mixed in with banking all sorts of strange conflicts of interest are created.
It is much better to actually know what the customer wants – and what they can afford – rather than squeezing them out of shape and into a product just because it is what you are selling.
We are already seeing some of these changes in action on the home loan front with the use of much more realistic household budgets with customers having to prove that they can actually service loans.
That subsequent rationing of home and investment loans is playing very uncomfortably into a slowing property market but maybe that greater caution will turn out to be a good thing for the banks, their customers and the real estate market.
There has been a lot of focus on values within companies and most of the bank bosses had to admit that they were too focussed on revenue and profit and not enough on making sound, long term decisions.
Some of the banks have even reacted to this questioning of their values and have come up with some helpful acronyms to describe themselves.
However, I think it could be back to the drawing board once the Commission reports, with a focus more on actual change than helpful homilies.
NAB (ASX: NAB) chief executive Andrew Thorburn seemed quite keen on his bank’s EPIC values – of Empathy, Perform, Imagine, Connect.
But by the time the Commission had finished with him and even more so NAB’s recalcitrant and crotchety chairman Ken Henry it was more like an EPIC fail.
It was no better for ANZ’s (ASX: ANZ) boss Shayne Elliott who brought along ICARE, which stood for Integrity, Collaboration, Accountability, Respect and Excellence.
Once counsel assisting, Rowena “shock and” Orr, QC had finished with Mr Elliott, it seemed the only thing ANZ were excellent at was not telling the regulator about stuff-ups and then taking absolutely forever to pay customers back when mistakes were made.
Bonuses and incentives
The area of bonuses and incentives is one area that is sure to be central to the Royal Commission’s findings.
Just about every major issue that was uncovered by the Commission could eventually be traced back to how bonuses and incentives were structured and achieved.
In the broadest sense it was big bank bonuses for executives that drove the sales culture all the way from senior executives down to bank tellers and home loan brokers.
Those incentives will need to be completely redesigned if the culture within these large organisations is to change.
One hint about the way that might work was when Commissioner Hayne closely grilled Macquarie (ASX: MQG) chief Nicholas Moore.
Macquarie uses a model of paying executives low fixed salaries plus a profit share based on results.
Those bonuses are long term in nature and are actually paid down a track a few years when it is certain that the profits are genuine and there are no ensuing problems.
By contrast, the big four retail banks usually pay bonuses straight away as a fixed percentage of an already high salary.
The Macquarie model could be hard to implement for the big banks given that some parts of business are much more profitable than others but it will not be a surprise if Macquarie ends up being something of a model for how bonuses are structured.
Other likely changes include how mortgage brokers are paid and their responsibility to their clients.
It wasn’t just banks and financial services companies that came out of the Commission looking tarnished – the regulators also copped a pasting.
ASIC (Australian Securities and Investments Commission) and to a lesser extent APRA (Australian Prudential Regulation Authority) were both under fire and did not cope well with detailed questioning of their activities.
In particular, ASIC came across as a regulator that was overwhelmed and under-resourced, which left it unable to mix it with the wealthy banks and their considerable legal and other resources.
The result seemed to be that ASIC went for the easiest option on every occasion, cosying up to the banks and using enforceable undertakings to get results rather than opting for court action.
ASIC also didn’t seem to be across its brief, being unaware of some of the scandals that the Royal Commission was uncovering.
Commissioner Hayne also seemed surprised that meetings with the banks were not recorded and that the banks seemed to have the ability to delay refunds and remediation almost indefinitely with no penalties.
It will not be a surprise if there are several recommendations about changes to ASIC and also potentially to APRA.