Those looking for a massive banking apocalypse in the final report of the Hayne Royal Commission will be disappointed but there is every chance his comprehensive, slow burn approach will yield better results.
The findings were quite obviously cast for a long term transformation of the entire financial sector, with a lot of emphasis on much stronger enforcement activity from regulators ASIC and APRA and a new overarching regulator to keep them both accountable.
Cleverly, Royal commissioner Kenneth Hayne has initially given these two regulators the task of sifting through his list of 24 companies for potential criminal and civil action rather than directly naming a few individuals in the report so they can be figuratively tarred and feathered.
Regulators set to go through the list
Those regulators could not have a better incentive to show how activist they can be than to prosecute some of the most egregious behaviour, which includes a long list of major companies including Suncorp, ANZ, NAB, CommInsure, Allianz, AMP and ClearView.
Of those, Commissioner Hayne did single out NAB chief executive Andrew Thorburn and chairman and former Treasury secretary Ken Henry for a special mention of not being confident they will carry out the necessary changes.
That is not to say that there aren’t plenty of sound changes and cultural shifts that will happen directly out of the report – it is just that the “big bang’’ changes such as the enforced separation of financial advice and wealth management or banking businesses didn’t happen.
So vertical integration remains but will still need to be recast through a different regulatory system and some of the fee streams that have been the bread and butter of financial planning and superannuation will dry up.
Starting with banking, mortgage broking is set for a major overhaul with brokers required to act in the best interest of borrowers, who will now also be responsible for paying the mortgage broker rather than the bank providing the loan.
Just getting rid of those trailing commissions and ensuring brokers work for their customers should improve what has been a murky area of conflicted remuneration for years, although it won’t do anything to boost the income of mortgage brokers.
It might also see banks expand their attempts to write more home loans directly rather than using the broker channel, which customers might be more reluctant to use if they pay for it up front.
The action on improving banking access and treatment of farmers and those with poor English skills is sensible, as is the departure of dishonour fees on basic accounts.
Also timely is the series of measures to improve lending conditions for farmers who are battling drought and to ensure that appointing receivers really is a last resort and including car dealers in national consumer credit protection laws.
Overall, the banking sector should be subject to much tougher regulation and be more focused on the customers rather than on sales and profits, although the proof will be in the pudding.
Importantly, there are no major changes that will restrict the issuing of new home loans – one factor that could have had a major impact on the struggling property sector which is dealing with price falls, particularly in Melbourne and Sydney.
Loans will remain more difficult to obtain but fears of a credit crunch will hopefully be removed.
Remuneration should also change over time from the old days of bonuses being based on the growth of profits to include measures such as adhering to regulations and culture and governance will also be brought to the fore.
At first blush it seems that the superannuation industry has not been hit very hard by this Commission.
That is true on one level but the reduction and eradication or a range of fees that account for many millions of dollars will ensure super becomes more about retirement incomes than a gravy train for wealth managers.
Fees at a number of levels will be lowered or abolished.
One really good innovation is long overdue – removing the issue of millions of Australians who have multiple superannuation accounts.
Under the changes, everyone will have a single default account to which others can be “stapled’’.
That will eradicate millions of dollars of unnecessary insurance and management fees and the changes forecast by the Productivity Commission might also be added.
There is a ban on advice fees deducted from MySuper accounts and most advice fees for non-MySuper accounts will also be prohibited.
Hard selling of superannuation will be abolished.
That will hit many of the default funds hard because they have grown accustomed to charging advice fees.
Trustees and executives in the $2.8 trillion superannuation sector will also be heavily checked by regulators, putting them on the same level of supervision as bank chiefs.
Regulators would have the power to curb bonuses, vet appointments and force funds to map out executive responsibilities.
Funds will also be prohibited from wining and dining employers at functions and sports events and trustees will need to ensure that is their primary responsibility.
All banking licence holders will need to report “serious compliance concerns” about individual financial advisers to ASIC on a quarterly basis.
All of which probably adds up to more consolidation of funds over time.
There are some major changes coming here but most of them have been forecast, although that will come as cold comfort for some of the companies involved.
That old bugbear of “grandfathered” commissions that sometimes stretch back for decades will finally be dealt with through an effective ban and there will be tighter curbs on fees charged by advisers and a new disciplinary regime for the sector.
Vertical integration – in which banks and other wealth managers also own advice businesses – will still be allowed but the jury is still out as to whether that will remain a good idea.
Of the banks, only Westpac has persisted with the vertical integration model, with the others in the process of selling their financial planning arms.
A new disciplinary system will apply to all financial advisers.
This report will create a less than quiet revolution in insurance, which has been given a soft ride for too long.
All sorts of commissions will be reduced, banned or phased out so that insurance products become more transparent.
Heavy-handed selling of insurance products will be banned, funeral insurance policies will be defined as a financial product and be brought under ASIC oversight and there will be a cap on the commission that can be paid to car sellers for add-on insurance products.
Handling and settlement of insurance claims will be defined as a financial service.
All conflicted remuneration exemptions should be referred with a view to banning them outright.
Bonuses and culture
Across the board financial companies will need to annually review the design and features of their remuneration systems for frontline staff and also assess their own culture and governance.
Regulators will need to act
Both ASIC and APRA will remain as they are but they will be overseen by a new independent authority that will check to ensure they are carrying out their responsibilities.
ASIC in particular will need to change its enforcement approach to focus on court action rather than infringement notices.
ASIC will also be naming companies that breach financial service regulations to add some punch to its warnings.
Compensation for damage
Community legal groups helping those with financial complaints will be better funded and there will be a compensation scheme of last resort for those unable to get financial refunds or help from their institution.
It is a long list of changes and a lot for financial markets to take in but it seems like the stock exchange already had a good read on the findings before they were out, hammering the share prices of the big fund managers but boosting the share prices of the big banks.