Commissioner Kenneth Hayne recently handed down the final report of the Royal Commission into the misconduct of banks and financial institutions. In this report, there was no gore for shameful behaviour heard, no structural separation of the banks, no overhaul of the regulators and no head on the sticks.

Yet, the over 950-page report made 76 recommendations with far-reaching implications for the financial services industry and its clientele. It would improve commercial behaviour, customer service, lower fees, change corporate culture and enhance governance in the industry.

The key recommendations will encompass the major segments of the financial services industry, including mortgage, superannuation, financial planning advice, insurance, agricultural finance as well as regulators for Australian banking and finance.

Mortgage Brokerage
In the $1.6 trillion mortgage broking market, banks and other lenders pay $2.4 billion a year to mortgage brokers as an up-front commission for introducing new borrowers. Mortgage brokers represent over 20,000 businesses and they organise more than half of all new home loans.

Commissioner Hayne recommended to:

(a) make borrowers rather than lenders pay up-front commission to the mortgage broker for their services,

(b) ban lenders from paying trail commissions to mortgage brokers for new loans and

(c) ask lenders to require mortgage brokers to act in the best interests of the intending borrower, not the lender/bank providing the loan.

Australia has a $2.8 trillion superannuation industry. Over 90 percent of Australians are covered by the superannuation system and there are over 10 million unintended multiple superannuation accounts which are fee-drainers on these accounts.

The report recommended that:

(a) a single default super fund for each employee. All multiple accounts would be stapled to a single default account,

(b) advice fees would be banned to be deducted from MySuper accounts,

(c) advice fees for non-MySuper accounts would be prohibited in most cases and

(d) heavy-handed selling of add-on superannuation products to be abolished.

Financial Advice
In 2018, the financial advice industry consisted of over 20,000 entities. It generated $4.7 billion of revenue and made a profit of $1.6 billion. The total wage bill of this industry was $2.1 billion.

The Hayne Commission recommended that:

(a) a new regulatory system for financial advisers is created, with all advisers required to be registered. A single regulatory body would oversee the system,

(b) all banks be required to report “serious compliance concerns” about individual financial advisers to ASIC on a quarterly basis and

(c) grandfathered provisions of conflicted remuneration in the Future of Financial Advice legislation should be repealed as soon as possible.

The insurance industry is made up of various segments such as general insurance (vehicle as well as home and content), health insurance and life insurance. This industry provides valuable protection for assets, health, and lives of Australians. The behaviour of players in this industry has a high impact on the lifestyle of all Australian policyholders.

To improve the performance of this sector, the Royal Commission has the following recommendations:

(a) heavy-handed selling of insurance products be banned,

(b) funeral expense insurance policies are defined as a financial product, bringing it under the oversight of ASIC,

(c) handling and settlement of insurance claims be defined as a financial service and

(d) Impose a cap on the commission that can be paid to car sellers for add-on insurance products.

Australia has a large agricultural sector which consists of grain, rice, fruit, outdoor & undercover vegetable, cattle, shearing, dairy, cotton, poultry, fishing, forestry, horse farming, sugar cane, turf growing and agricultural support services.

In relation to the agricultural sector, Mr Hayne recommended to:

(a) establish a national scheme to mediate farm debts,

(b) require banks not to charge default interest on loans secured by farmland in an area declared to be in drought or subject to other natural disasters,

(c) have banks ensure managers of distressed farm loans are experienced agricultural bankers and

(d) recognize that appointment of receivers on a farm loan is a remedy of last resort.

Banking Regulators: ASIC and APRA
The Royal Commission recommended to:

(a) retain ASIC and APRA but have them overseen by a new independent authority that would assess the two regulators to ensure they are carrying out their responsibilities,

(b) have ASIC overhaul its approach to enforcement, with a focus on court action rather than infringement notices and

(c) have ASIC continue its annual reporting of breaches of financial service regulations but in future name the companies rather than just the type of breach.

The final report has referred 24 large companies to regulators (ASIC and APRA) for possible criminal or civil action. These companies include Suncorp, ANZ, NAB, CommInsure, Allianz, AMP and ClearView.

It also recommended the establishment of a Compensation Scheme of last resort for those unable to receive financial recompense from their institutions which would be funded by the financial services industry.

The report is basically a recommendation to the executive government. Any changes in the industry will need to be implemented through government legislation. Hence, it doesn’t necessarily mean laws will be enacted exactly as the Royal Commission final report recommends.