Some of Australia’s biggest banks could face criminal prosecution over the shocking fee-for-no-service scandal as part of a sweeping response to the royal commission’s damning final report.
The much-anticipated report of commissioner Kenneth Hayne will precipitate widespread changes in the financial sector designed to beef up regulators, compensate victims, overhaul banking remuneration, end the unlawful and excessive charging of fees, encourage cultural reform and better protect vulnerable and disadvantaged customers.
The government has immediately agreed to act on all 76 of Hayne’s recommendations, and the treasurer, Josh Frydenberg, conceded that “from today the sector must change, and change forever”. He promised to set up an industry funded compensation scheme of last resort to help victims of banking misconduct.
Hayne was widely expected to deliver tough recommendations after his royal commission exposed scandal after scandal, including billing the dead for financial advice, deliberately misleading regulators, lending to those with no capacity to repay, and the profit-motivated pushing of dodgy financial advice and insurance products. Hayne lay the blame for the misconduct directly at the feet of senior banking executives.
“There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management,” he said. “Nothing that is said in this report should be understood as diminishing that responsibility.”
Hayne also used the report to attack Australia’s financial regulators as “ineffective”, proposing what he described as a “radical” shake-up of Asic and the Australian Prudential Regulation Authority (Apra).
Hayne’s recommendations would give them greater power and more incentive to take banks to court. The regulators would also be subject to a new independent oversight body. Hayne flagged the potential for Asic’s role to be limited to one of investigation and referral, leaving court action to a new and separate “specialist civil enforcement agency”. He stopped short of recommending such a body, and the Coalition has already ruled it out.
Hayne recommended 24 cases of misconduct be referred to the financial regulators for consideration of civil or criminal action. The referrals involve almost all of the major banks except Westpac.
He also revealed he wrote to the corporate regulator, the Australian Securities and Investments Commission (Asic), late last year to invite them to “consider whether criminal or other legal proceedings” should be taken against unnamed banks involved in the fees-for-no-service scandal, in which customers were knowingly charged for financial advice they never received. AMP, ANZ, CBA, NAB and Westpac are already expected to pay $850m in remediation over the scandal.
“Examination of these issues by Asic is still continuing, and it would not be right for me to anticipate the outcome of those deliberations,” Hayne said. “Nor would it be right for me now to name the entities I identified in my communication to Asic.”
Hayne said charging customers for financial advice that was never provided was motivated simply by “greed: greed by licensees, and greed by advisers”. Individuals can be prosecuted, and the offences attract possible jail terms of 10 years.
Hayne has recommended significant changes to prevent banks for charging fees for no service. Banks would be required to get consent from its customer each year to charge them fees for services, and record in written form what those services are.
Banks will better take into account the needs of customers in remote areas and those without English language skills, while a national mediation scheme will be set up to help farmers struggling to pay back loans.
Retailers – car dealers, for example – are now likely to be subject to the nation’s consumer credit laws, a change long called for by consumer advocates.
Mortgage brokers also face a significant crackdown to improve standards and prevent misconduct. Hayne’s recommendations would require them to act in the best interests of borrowers or face civil penalties. He has also recommended the customer pay the broker for arranging the loan, rather than the lender.
Frydenberg has left the government some wiggle room on changes to end conflicted remuneration in the broking industry. Changes would only be implemented over stages and after careful consideration of the consequences on lending, Frydenberg said.
“You have to understand these are major changes for an industry and for existing business models, and there needs to be transition periods,” he said.
Banking industry codes of conduct will be expanded to cover more financial service providers, and Asic would be given a greater role in approving and enforcing the codes.
Remuneration for bank and lending staff would be overhauled, and Apra-regulated institutions would be required to change their bonus and remuneration structures to “encourage sound management of non-financial risks, and to reduce the risk of misconduct”. Boards would be required to regularly assess the effectiveness of their remuneration systems and set limits on the use of financial metrics for long-term bonuses.
Financial advisers would be required to tell all retail customers “simply and concisely why the adviser is not independent, impartial and unbiased”.
Providers of financial advice would be required to investigate misconduct where it is detected, before advising and remediating all those affected as soon as possible. A single, centralised disciplinary body would be established for advisers and all financial advisers would be required to register.
Providers of financial advice would be compelled to report serious compliance concerns, and the body could also take reports of misconduct from clients and other stakeholders. A review of the changes to the financial advice sector has been flagged in three years.
Asic and Apra, whose efforts to punish misconduct were found sorely wanting, face a raft of changes, including:
• A requirement that Asic must, as a starting point, determine whether misconduct warrants court action. It should reduce its reliance on infringement notices for misconduct, because it is “rarely” useful against wealthy corporations.
• Asic and Apra must coordinate and share information more effectively.
• Both agencies should be subjected to quadrennial capability reviews. Apra should undergo such a review as soon as possible.
• A new oversight body should be established to scrutinise their effectiveness. The body would report to the minister biennially.
• Hayne has flagged reducing Asic’s role to purely investigative. In this scenario, which Hayne acknowledges is “radical”, Asic would simply investigate misconduct, before referring it to a specialist independent enforcement agency, which would then take court action.
“Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished,” Hayne said. “Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation. And wrongdoing is not denounced by issuing a media release.”
Major changes to superannuation include ensuring each Australian has a single default account. Restrictions will be placed on the charging of advice fees to super customers. Hawking super products will also be banned to protect vulnerable customers.
Frydenberg, who spent the weekend formulating the government’s response, has agreed to act on all 76 recommendations. The government has proposed a compensation scheme of last resort to pay victims of misconduct, which would be funded by the industry.
The remit of the Australian Financial Complaints Authority (Afca) would be expanded to allow it to compensate victims of misconduct from up to 10 years ago, up from the previous limit of six.
About 300 customers who previously had Afca make determinations in their favour, but did not receive any money, will be compensated for about $30m. The federal court will be given greater jurisdiction to hear corporate criminal misconduct, a move the government hopes will ease the burden on state courts and reduce delays.
It has also acted on Hayne’s recommendation for an immediate capability review of Apra, appointing Graeme Samuel to do the work.
“Too often the conduct within our financial institutions has been in breach of existing laws and fallen well below community expectations,” Frydenberg said. “The price paid by our community has been immense and goes beyond just the financial. Businesses have been broken, and the emotional stress and personal pain have broken lives.”
In the lead-up to the report’s release, delivered just after the market’s closed on Monday, the big banks had braced for a major shake-up. The Australian Banking Association chief executive, Anna Bligh, admitted the banks had failed and the sector needed a reset.
“While we don’t know the recommendations in the report, we do know this is an opportunity to reset the industry and to make things better for our customers,” Bligh said before the report’s release.
Hayne foreshadowed resistance to what he has called for. He said the sector will try to argue the fundamental reforms he has outlined will cause “unintended consequences”. But he said the moment was pivotal and must be seized upon if the nation wished to avoid a repeat of the misconduct demonstrated in the royal commission.
“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,” he said. “The financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again.”
Among the cases referred for possible court action, Commonwealth Bank was referred to Asic for its conduct in a distribution deal that saw it push an underperforming super fund, Essential Super, on retail customers alongside a “financial health check”. The deal saw CBA receive a 30% return on the fund’s revenue.
“In this way, it could reasonably be expected to influence which product branch staff were trained and told to recommend and the financial product advice given to retail clients,” Hayne wrote. “Indeed, it would be surprising if it did not have this effect.”
CommInsure, the bank’s insurance arm, was separately referred to Asic for its refusal to pay out heart attack and cancer victims. CommInsure had relied on out-of-date definitions and ignored medical advice in making its decisions.
Allianz was referred to Asic for misleading and deceiving its insurance companies about life insurance, travel insurance, home insurance, and car insurance, in some cases leaving deceptive material on its website for six years.
Other institutions referred to the regulators included AMP, National Australia Bank, ANZ, Colonial, Suncorp, CSF, Questor, OnePath Custodians, Oasis and IOOF Investment Management Limited, TAL Life Limited and Youi.