Friday 1st February 2019
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Be prepared for the final report from Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to trump the outcomes of our own local industry review.
Just how far Commissioner Kenneth Hayne will go in his final report will be revealed late Monday when the Australian federal government is due to release it at 6.10pm, New Zealand time.
Australia is abuzz with speculation: will Hayne recommend a ban on vertically integrated firms, for example?
That would mean mighty institutions such as AMP and ANZ Bank would no longer be able to both create investment and life insurance products and sell them through their own networks.
Or will Hayne recommend a ban on banks and other mortgage lending institutions paying commissions to mortgage brokers for placing loans with them?
And what about the commissions paid to financial advisers and insurance salespeople?
Given that Australia’s “big five” financial institutions - ANZ Bank, Commonwealth Bank of Australia, National Australia Bank, Westpac and AMP - own New Zealand’s big five institutions, any changes made to the rules in Australia are likely to have an impact here.
Worse still from a banker’s viewpoint: will Hayne suggest taking an axe to bankers’ salaries or even recommend criminal charges be laid against individual senior executives?
Hayne’s interim report published last September made no bones about the obvious conflict of interest in advisers and bank staff being paid commissions for recommending a company’s investment or insurance products to consumers.
There’s plenty of evidence to support the view that customers are getting the short straw.
For example, the Australian Securities and Investments Commission examined the files of 10 advisers associated with AMP and the four big banks and found that in 75 percent of cases the adviser appeared to have put their own interests above the best interests of the customer.
In 10 percent of the files reviewed, ASIC worried that the advice might have caused the customer actual financial harm.
Hayne’s comment was that such results “demonstrate the validity of a basic observation of the world: that the choice between interest and duty is resolved, more often than not, in favour of self-interest.”
The Financial Markets Authority here estimates only 2 percent of sales of life insurance policies are actually genuinely new; the rest are people switching from one policy to another. When one looks at the fact that advisers get upfront commissions of 170-210 percent of the first year's premium it isn't hard to hazard a guess why.
Hayne's interim report also had some choice words about sales volume-driven remuneration and the fact that bankers seem to receive bonuses divorced from actual performance.
But another Hayne focus may be particularly pertinent in New Zealand: his interim report didn’t include a rash of recommendations and proposed law changes.
Instead, he noted that the regulators - ASIC and the Australian Prudential Regulatory Authority - haven’t been exercising the teeth the laws already give them.
In presenting the Reserve Bank and Financial Markets Authority’s review of the life insurance industry here earlier this week, FMA chief executive Rob Everett batted back the suggestion that the same might be true in New Zealand.
The Australian laws already have some of the teeth the FMA and Reserve Bank are now asking the government for, Everett said.
“We’ve got to work with what we’ve got and more can be done to try to drive change,” he said.
“We’re committed to do that, whether or not we get specific regulatory powers.”
Among the changes Everett wants to see are for the FMA to have direct oversight of insurance companies, rather than just of market conduct as it has now, and more powers to demand information, irrespective of whether there’s been any actual breach of the law.
He noted that the life insurance review had been conducted with voluntary co-operation from the 16 companies involved.
Commerce Minister Kris Faafoi has already announced plans to fast-track customer protection measures into legislation along the lines the two regulators have recommended. It’s likely the Australian royal commission’s findings will provide added fodder for law changes.
However, the Reserve Bank and FMA remain steadfast against using one weapon they already have: naming and shaming.
Their report details a number of specific examples of misconduct they uncovered, including one company that discovered in 2015 that it had been overcharging 223 customers.
That company had sat back and waited for customers to complain and, three years later, 111 of those customers still hadn’t had their cases dealt with or refunds paid.
Despite the specificity of this case, the regulators say they need to further investigate before identifying which life insurer that was.
The FMA adopted a similar approach last year when it released its findings of an investigation of 11 life insurance firms. Three firms had been subject to further investigation but the FMA ending up deciding to take no further action, still without identifying which three firms were involved.
The establishment of the FMA was supposed to improve on the perceived shortcomings of its predecessor, the Securities Commission.
Notably, the Securities Commission published a number of reports on finance companies, without naming names. Most later collapsed, destroying more than $3 billion of their depositors’ savings.
Commissioner Hayne could give New Zealand’s regulators a few tips: his inquiry has spent more than a year of naming names, leading to major shake-ups of such venerable institutions as AMP and CBA.
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