Australia

The banking royal commission report has finally been released, so what happens now?

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With minimal parliamentary sitting days ahead of the election, the timeframe for implementing legal reform is tight.

The repeated and systemic nature of the misconduct and poor treatment of consumers have been revealed in the year-long banking royal commission. 

The recommendations in the final report have focused on ending the unsolicited sales of financial products, banning conflicted remuneration earned by intermediaries like mortgage brokers, and better enforcement of legal standards.

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Josh Frydenberg on Royal Commission findings
Josh Frydenberg on Royal Commission findings

Treasurer Josh Frydenberg said the government is acting to restore the community's trust in the financial sector.

"My message to the financial sector today is that this misconduct must end. And you must put the interests of consumers first. Consumers must be treated honestly and fairly," he said.

What do the findings mean for victims of banking misconduct? 

The federal government has promised to establish a compensation scheme of last resort. To be funded by industry, the scheme will also provide $30 million to 300 consumers relating to old claims. 

Twenty-four financial entities have been referred to ASIC over possible criminal charges. The entities include, either directly or through subsidiaries, all the major banks except Westpac. Treasurer Frydenberg said he feels confident "ASIC will do the job". 

"With the new leadership at ASIC, they are getting on with delivering better outcomes for Australian consumers," he said, rejecting any suggestion that the watchdog's prosecution capabilities would be removed, if it does not take a more aggressive approach to legal breaches. 

Slater and Gordon lawyer Ben Hardwick said he expects more class actions to arise out of the instances of banking misconduct uncovered in the royal commission. 

"The royal commission has shone a light on the very conduct we have been investigating," Mr Hardwick said referring to the class actions commenced in September and October last year, against CBA and NAB respectively.

"We also expect the regulator to embark on a number of legal actions: some civil and some criminal. And I think the role of class actions is an important mechanism that complements the role of regulator. So we will continue to play that role over the months and years."

Westpac CEO Brian Hartzer (top left), National Australia Bank CEO Andrew Thorburn (top right), CBA CEO Matt Comyn (bottom left) and ANZ CEO Shayne Elliott.
Bank CEOs attend the Royal Commission from top left to right: Westpac's Brian Hartzer, NAB's Andrew Thorburn, CBA's Matt Comyn and ANZ's Shayne Elliott.
AAP

He said the success of class actions in recent years has resulted in changes in the culture of the banks on issues like charging ATM fees to customers from rival banks.

"The real change we need to see is that the ticket clipping has to stop. Skimming people's accounts has to stop. And so through class actions and regulatory action, we would hope to see cultural change in the banks; that they will no longer be skimming accounts in the many and varied ways as they have been."

A review into watchdog APRA will be conducted by former ACCC chairman Graeme Samuel; and a new regulator is set to be established to oversee watchdogs APRA and ASIC.

What do the findings mean for consumers? 

The government said it will introduce a ban on conflicted remuneration earned by mortgage brokers and financial advisers. Trailing commissions and volume bonuses for mortgage bonuses would be prohibited under legislation the government said it wants to commence on 1 July 2020. 

Corporate law governance expert Helen Bird from Swinburne University of Technology said that delay will mean more instances of banking misconduct in the meantime. 

"That is quite a long time for someone who is affected to see change take place. So some of it [legal reform] is going to be slow. 

Banking royal commissioner Kenneth Hayne QC says the time has come to address financial misconduct and prevent its recurrence.
Banking royal commissioner Kenneth Hayne QC says the time has come to address financial misconduct and prevent its recurrence.
AAP

"Some of it is going to require us to have faith in the regulator to do the job that the Commissioner [Kenneth Hayne] was fundamentally critical of."

The first sitting fortnight begins next week, and it is also the last before the April budget, after which the government is expected to announce the date of the election.

Treasurer Frydenberg said the government is committed to implementing all 76 recommendations in the final report, but stopped short of endorsing the recommendation that customers pay upfront fees to mortgage brokers.

Such a move would end the practice of commissions coming from the banks and thereby creating a conflict of interest for the mortgage broker.

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What will the royal commission findings mean for consumers?
What will the royal commission findings mean for consumers?

Consumer group CHOICE welcomed the recommendations in the final report, saying it would be watching government and industry to ensure the findings are implemented.

“The sector that cops the greatest wrath—and quite rightly—is the mortgage broking industry. The Royal Commission says that payments by banks to brokers should be banned, and that brokers should have strong obligations to act for their customer—the person taking out the loan.”

“For the first time, the broking industry will have to prove that it is offering a service that consumers are willing to pay for. If they think they are offering value, they have nothing to fear from this reform.”

What do the findings mean for the financial services industry? 

The Finance Brokers Association of Australia said it fears the ban on trailing commissions will ultimately reduce housing affordability.

"This could force up-front commissions to rise in order to compensate for reduced revenues to brokerages, which in turn will lift interest rates and make housing affordability more difficult," said the group's managing director, Peter White. 

The Australian Banking Association (ABA) described the ban on mortgage broker fees as "radical", saying it would take more time to examine the recommendation and the government's response.

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Major impact on the big banks and consumers
Major impact on the big banks and consumers

"I think the Commissioner has been very concerned to make sure that we minimise conflicts between how mortgage brokers are rewarded; and the best outcomes for customers. But I think there is some very radical suggestions here that need some very careful thinking, before they are rushed into," ABA chief executive Anna Bligh said.

The Greens party said it wanted to see more structural reform than was called for in the final report, such as breaking up the banks by separating retail banking, investment banking and wealth management arms. 

"The Commission’s failure to resolve the issue of vertical and horizontal integration is a notable example of an inquiry that has been constrained," said Greens spokesperson Peter Whish-Wilson.

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Australian banking sector 'dishonest', scathing final royal commission report finds
Australian banking sector 'dishonest', scathing final royal commission report finds

“Sadly the Commissioner’s brief was limited from the outset, as was his time to consider detailed policy issues.

“The historical significance of [the final] report depends on what unfolds from here. Will long suffering victims of financial misconduct now be appropriately compensated? Will the regulators take up Justice Haynes challenge and pursue criminal charges against the banks?"

Dr Andrew Grant, senior lecturer at the University of Sydney Business School, said there had been concerns about the impact of the final report on credit flows in the economy, but the recommendations and the government's response have proven to be more tempered. 

Australian Banking Association CEO Anna Bligh at a press conference in response to the releasing of the Banking Royal Commission findings.
Australian Banking Association CEO Anna Bligh at a press conference in response to the releasing of the Banking Royal Commission findings.
AAP

"It is drawing a fine line. And there needs to be balancing act between how strict the regulations we want of our financial institutions are going to be and whether that works for the general public and marketplace as a whole," Dr Grant said.

"We don't to implement regulations just because the general public is unhappy with what they perceive to be bad behaviour by banks, if it is confined to certain areas of banking behaviour.

"What we're seeing here is that they have refined processes to measure the expenses of someone looking to borrow money; rather than just using the household expenditure measure (HEM).

"Several banks are trying to get a more detailed picture of borrower expenses. So on average this might increase the difficulty of the average consumer to get a loan, but it might be better for the system overall."

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