It is time to pour out the popcorn, sit down and get ready for one of the biggest weeks in living memory for the Australian financial system.
It all starts on Monday with the public release of the Hayne Royal Commission recommendations by Treasurer John Frydenberg, which will be awaited with bated breath by everyone from mortgage brokers and financial planners right through to insurance companies, superannuation funds and bankers.
By now we all know about the symptoms from the Royal Commission hearings – greedy banks and other financial players that were too busy lining their own pockets and those of their shareholders to notice or act on massive ethical breaches.
Those breaches ranged from charging dead people for financial advice all the way through to what amounts to basic theft through unjustified fees or selling useless insurance, along with hopelessly slow and inefficient ways to pay refunds to customers and repeated lies told to regulators.
Banks have already paid out $7.4 billion
Since the Royal Commission it has been estimated that banks have already allowed for payments of around $7.4 billion to make up for their bad behaviour.
Bank and other financial sector shareholders have already sacrificed much more in the form of hefty share market falls, particularly for companies like AMP and IOOF but also for the banks themselves and other insurers and fund managers.
That is before the real action starts and on Monday Royal Commissioner Kenneth Hayne’s prescription to cure Australia’s financial sector will finally be unveiled.
If the Royal Commission hearings are any guide, the medicine is going to be particularly hard to swallow but with both sides of politics under pressure to fully accept the recommendations, the sector is going to be forced to hold its nose and gulp it down.
Ramifications are enormous
The ramifications are potentially enormous.
Bankers are set to lose their big bonuses and face a heavily restructured remuneration system.
Lots of financial planners and mortgage brokers will potentially lose their jobs as their entire industry is changed and educational and other standards are lifted and trailing commissions potentially disappear.
Superannuation funds that underperform face closure or merger and shareholders in all of the financial sector companies are looking at a period of great uncertainty as their boards and executives hurry to adjust to the new environment or potentially be wiped out.
Customers will notice a lot of changes too.
Getting a mortgage will be different and potentially much harder and smaller than anticipated.
Other credit such as personal loans and credit cards could be more difficult to obtain as well and the old days in which unsolicited credit limit increases arrived in the post every year will become a distant memory.
Getting financial advice will be very different, as will getting life and other insurance through your superannuation or outside it.
Exactly what form the Hayne prescription will take is difficult to know precisely but if nothing else the Royal Commissioner has shown himself to be laser sharp in seeing where the balance between the customer and the financial institution has swung too far towards the latter and he will be trying his best to produce a much more balanced situation.
Part of that will be trying to greatly increase the rigour and effectiveness of the timid financial sector regulators, ASIC and APRA, but part of it will no doubt involve producing regulatory changes that enshrine customer rights and enforce appropriate penalties on institutions that cross the line and lose focus on serving customers.
It is notoriously difficult to enforce moral and ethical standards in business but by changing the structures and regulations, Hayne should be able to enforce much better standards and hopefully drive out some of the worst excesses in the industry.
Here are some of the potential areas of change:
When taken together with the Productivity Commission’s findings, Australia’s $2.7 trillion superannuation industry looks set for a major shake-up.
Many super funds – most of them bank owned – committed massive misconduct and breached laws.
That included NAB allegedly failing to notify the regulator of breaches within the 10-day timeframe, CBA failing to move 13,000 super funds to the no-frills MySuper accounts by the deadline and plenty of underperforming super funds.
Expect extensive legislative and regulatory changes, higher fines for misconduct and more stringent oversight.
Underperforming funds are likely to be removed from the industry and workers could keep their funds rather than starting a new one every time they change jobs.
There could also be fines for funds that do not act in the best interests of members.
Home loans and consumer finance
Banks are already being tougher on home loan customers but the Royal Commission might expand on this in the $1.6 trillion mortgage market.
The commission was concerned that banks were not really checking on borrowers’ living expenses, instead relying on statistical benchmarks as a proxy for the household budgets.
In response, banks have required customers to provide more detail about their living expenses when applying for loans, and are promising to cut their use of standardised expenses benchmarks such as HEM.
Expect banks to be forced to go into more detail in knowing their customer’s circumstances and potentially even getting rid of standardised models such as HEM entirely.
Mortgage brokers arrange more than half of all new home loans but this looks set for a major shake-up.
Commissioner Hayne seemed unconvinced that commission-based broker remuneration model was justified, prompting speculation of significant changes and perhaps a replacement of commissions by flat fees.
Insurers in trouble
Insurance has been excluded from some of the laws that apply to other financial services businesses but that could be set to change after the Royal Commission heard of many terrible examples of misconduct and useless products.
They included boiler rooms selling policies of little value, valid claims being unjustly knocked back and the use of outdated medical definitions.
Some of these activities such as cold-calling insurance sales could be banned altogether while regulation and supervision will be increased.
One of the worst features of the commission evidence was the way that bankers could be paid bigger bonuses through perverse incentives that put profits before customers.
Banks have already moved to change their sales targets but it could be that Hayne recommends a more thorough regulation of banker pay and incentive systems and sales targets.
The fallout from the royal commission will change the financial planning industry forever.
The commission heard wealth managers acted to benefit financial advisers, most obviously through continuing with grandfathered trailing commissions with little consideration of whether customers actually received any financial advice for their money.
The big four banks have already allotted $2.5 billion for compensation and wealth manager AMP could have to pay $1.5 billion and IOOF $780 million over the next four years.
Trailing commissions could become history and the vertically integrated business model might be banned altogether – something most of the banks have anticipated by selling off their financial planning arms.
Farmers and remote communities
The Royal Commission also looked at how banks treat farmers and Hayne might look to change how banks charge default interest on impaired loans after natural disasters and perhaps force banks to mediate with customers where a farm is used to secure a loan.
Hayne might also look to stop the current practice of garnishing Centrelink payments when a customer on government benefits accesses an overdraft facility.
Consumers to benefit
At the end of the Hayne revolution, the entire financial landscape will look very different to what it does now.
It is going to be radically different but hopefully customers will no longer be sandbagged by unjustified fees and charges.
For investors, there could be a lot of opportunities, particularly if you can pick the right beaten down financial institution that is making the right moves to adapt to the changes and retain and expand on its customer base.