Royal Commission publishes interim report on banking misconduct

The Financial Services Royal Commission has published its highly anticipated interim report into misconduct in the finance industry, but discussions around superannuation and insurance will have to wait until the final report that's due by February next year.

Covering issues ranging from consumer and SME lending to financial advice, the report draws on issues raised during the first four rounds of hearings held in Melbourne, Brisbane and Darwin between March and July 2018.

These hearings were informed by information provided by the public, regulators, consumer advocacy groups and financial services entities.

In an executive summary of the report, Commissioner Kenneth Hayne said the conduct of financial services entities that had brought about such condemnation from the public was often the result of greed - "the pursuit of short term profit at the expense of basic standards of honesty".

"How else is charging continuing advice fees to the dead to be explained? But it is necessary then to go behind the particular events and ask how and why they came about," he said.

"Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention.

"Products and services multiplied. Banks searched for their 'share of the customer's wallet'. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales."

Commissioner Hayne emphasised that misconduct often went unpunished when it was revealed, or the consequences were not proportionate to the wrongdoing at hand.

"The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court," he said.

"Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable 'concerns' about the entity's conduct.

"Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a 'community benefit payment', but the amount was far less than the penalty that ASIC could properly have asked a court to impose."

ASIC chair James Shipton welcomed the interim report and took stock of its criticisms.

"ASIC notes the report's serious and important observations of ASIC's role as a regulator," Shipton said.

"ASIC will carefully consider these observations, as well as the broader findings in the report, and will respond fully in its submission by 26 October 2018.

"ASIC will continue to assist the Royal Commission and to work with the Government, the Parliament and other regulators to build a stronger legislative, enforcement and regulatory framework with tougher penalties."

Commissioner Hayne went on to mention how various announcements including refund programs, remediation, the abandonment of products and practices, the sale of whole divisions of businesses, and greater regulation have been made as the Commission's work goes on.

"The law already requires entities to 'do all things necessary to ensure' that the services they are licensed to provide are provided 'efficiently, honestly and fairly'," he said.

"Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, 'Do not do that', would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?"

He then asked whether the existing law needs to be administered or enforced differently. Questions that have arisen from the Commission's work so far are gathered in Chapter 10, and submissions in response to the report can be made on the Royal Commission website before 5pm on 26 October 2018.

The next and final round of hearings for the Royal Commission will be held in Sydney (19-23 November 2018) and Melbourne (26-30 November 2018). 

Royal Commission background

In a release published earlier today in anticipation of the interim report, several University of Sydney experts came together to provide a comprehensive overview of how the Banking Royal Commission came about, and what it might mean for consumers. 

The Commission was established by former Prime Minister Malcolm Turnbull in December last year, and was instigated by media exposés on a series of banking scandals, with one of the most notable being ABC Four Corners' into malpractices at the Commonwealth Bank's financial planning division.

It didn't take long before the behaviour of all major Australian banks were put under scrutiny and their reputations fell like dominos.

Professor Susan Thorp of the University of Sydney Business School explained that the Royal Commission exposed widespread failures to act in the best interest of members, with "conflicting incentives operating on trustees and managers".

"These failures have included charging advice fees when no advice service was delivered and taking excessively long times to transfer members to low-cost default (MySuper) funds," she said.

Professor David Kinley of the Sydney Law School said the Commission had effectively 'humanised banking bastardry'.

"Our erstwhile 'ho-hum' acceptance that while banks are likely ripping us off here and there, it's just the price we pay for financial convenience and security, has been well and truly exposed as the self-delusion it is," he said.

"The inquiry's lid-lifting on the breadth and depth of conniving practices buried in small print, or worse, deliberately hidden from customers by artful deception, has shocked Australians out of their complacency."

So far there have been five public consultations with 8,977 public submissions received, of which 63 percent refer to the banking industry and the main nature of the dealings around personal finance.

The information-gathering over the past 10 months has revealed stories of everyday consumers involving bankruptcy, loss of family and even homelessness.

Associate Professor Eliza Wu said the key problems identified in the Commission were "concentrated in the consumer finance and superannuation services. When a small handful of large financial institutions are providing financial services and cross-selling to many retail customers within a domestic financial system, trust evaporates quickly when scandals hit again and again".

"When a small handful of large financial institutions are providing financial services and cross-selling to many retail customers within a domestic financial system, trust evaporates quickly when scandals hit again and again."

While Professor David Kinley described the first line of response from banks as "predictable".

"What banks and other financial institutions do next, however, is what really matters," he said.

"Fig-leaf reforms will not cut it with ordinary folk and our poll-driven politicians. 'Putting people above profit' sloganeering rings not only hollow these days, even decidedly deceitful."

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