Tuesday 5th February 2019
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The 76 recommendations from Australia's royal commission on banking include sweeping reforms.
The ones most likely to cause shock waves in New Zealand include banning commissions paid to mortgage brokers, the repeal of grandfathering of conflicted remuneration for financial advisers and a ban on hawking all superannuation and insurance products, including those covering funeral expenses.
Australia's federal government has pledged to “take action” on all 76 recommendations.
While Commissioner Kenneth Hayne didn't recommend criminal or civil charges be brought against individuals or organisations, he has recommended that regulators look at at least 24 cases of misconduct with a view to taking further action.
Some of these relate to the well-publicised scandal of institutions charging fees without delivering services and AMP and all the major banks except Westpac can expect to feel the heat.
Hayne's interim report last September complained that the regulators weren't using their powers to pursue prosecutions.
Mortgage brokers write more than 50 percent of Australian mortgages and their market share in New Zealand has been estimated as somewhere between 25-40 percent. In just about all cases, their remuneration is through commissions from the lenders with whom they place their clients' mortgages.
Haynes made no bones about greed causing the myriad problems he has unearthed in Australia over more than a year.
“In almost every case, the conduct in issue was driven not only by the relevant entity's pursuit of profit but also by individuals' pursuit of gain, whether in the form of remuneration for the individual or profit for the individual's business,” Hayne said in his report.
“Providing a service to customers was relegated to second place” and the roles of sellers and advisers became confused.
“Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial service industry have measured sales and profit, but not compliance with the law and proper standards,” Hayne says.
“Rewards have been paid regardless of whether the person rewarded should have done what they did.”
Hayne makes it crystal clear that the interests of consumers and those of advisers and companies providing investment products or services “are not only different, they are opposed. An intermediary who seeks to 'stand in more than one canoe' cannot.”
Conflicts of interest can seldom be managed effectively; “self-interest will almost always trump duty.”
And too often financial institutions have broken the law but haven't been properly held to account, Hayne says.
But the finance industry should be thankful for small mercies; Hayne didn't, for example, recommend an end to vertical integration.
That means banks such as ANZ and ASB will still be free to continue both creating retail investment products and selling them through their branch networks.
Other recommendations cover how banks should deal with distressed agricultural loans, how point-of-sale lending should be handled and that banks be banned from charging dishonour fees on basic accounts.
Hayne wants the Australian Securities and Investments Commission to be given the power to approve of and enforce finance industry codes of conduct, and for any ongoing fee arrangements to be subject to mandatory annual review by the client. No fees that haven't been expressly agreed to by the client will be permitted.
Where advisers have a conflict of interest – such as when they receive commissions – they must explain to the client in writing “simply and concisely why the adviser is not independent, impartial and unbiased.”
Of particular interest to New Zealand's life insurance industry, Hayne is recommending that ASIC should not only cap commissions and reduce that cap in respect of life risk insurance products but “unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.”
New Zealand's Financial Markets Authority and the Reserve Bank published a report on 16 life insurance companies last week that estimated upfront commissions on sales of life insurance policies are 170-210 percent.
Hayne made a number of recommendations relating to general insurance products and consumer credit insurance products including a review of whether conflicted remuneration related to such products remains justified.
He also recommended a new disciplinary system for financial advisers.
He also made a number of recommendations about how ASIC and the Australian Prudential Regulation Authority should co-operate with each other.
Hayne railed against institutions' “unwillingness to recognise and accept responsibility for misconduct” and against the way they dragged their heels in responding to misconduct and to compensating affected customers.
He singled out National Australia Bank, which owns Bank of New Zealand, saying that it “stands apart from the other three major banks” and that, after hearing from NAB chair Ken Henry and chief executive Andrew Thorburn, “I am not as confident as I would wish to be that the lessons of the past have been learned.”
Hayne “thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid … is likely to be more than A$100 million.”
He also thought it telling “that in the very week that NAB's chief executive and chair were to give evidence before the commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas.”
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