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BFCSA: Banking royal commission final report: Criminal referrals will shame finance sector

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Banking royal commission final report: Criminal referrals will shame finance sector

Australian Financial Review Feb 3, 2019 — 11:45 PM

The AFR View (editorial)


Kenneth Hayne has done a powerful job in sharply clarifying the legal duties that financial service providers owe their customers and that identified breaches of those duties – such as charging people for perhaps a billion dollars or so of services they never received amid their insurance, superannuation or financial advice – should be more vigorously penalised.

"There is no doubt that money was taken from clients," concludes Commissioner Hayne. "Nor is there any basis for doubting that, when taken, the taker did not intend to return it to the client".

There can be no argument with the basic proposition that the professional duty to customers should form the bedrock of the business of providing banking and financial services.

Commissioner Hayne's recommended 24 referrals for prosecution of institutions – including NAB, the ANZ and Commonwealth Bank – and individuals are set to become shamefully seared into the psyche of the sector and Australia's entire business community.

Thankfully, the royal commissioner's theme that the serious breaches identified in his hearings do not demand a sweeping increase in regulation, a structural reshaping of the sector or a complete overhaul of its regulatory framework.

Mortgage-lending banks won't be kicked out of superannuation or stopped from cross-selling financial services, though mortgage brokers that provide competition will be crimped.

To the contrary, Commissioner Hayne concludes, financial services regulation should be simplified by getting rid of complicating exemptions, too often gained by political lobbying.

He does not find that banks have been irresponsibly lending willy nilly to housing borrowers who could never repay the money. He rejects calls to extend consumer protection laws to small business lending, which would have risked strangling the supply of credit to small business.

Thankfully as well, Commissioner Hayne does not recommend banning so-called vertical integration in which a bank or wealth manager sells products it also "manufactures".

That would be an overly-prescriptive restriction on market structure and on how financial services providers can compete to meet their customers' needs.

Instead, the royal commission's final report would attack the potential for conflict of interest in a more principled way: for instance, by more sharply clarifying the legal duties for super trustees to act in the interests of their members.

Reflecting his central message that breaches of the law have not been punished, Commissioner Hayne calls for a much tougher approach from the "twin peak" regulators, the Australian Securities and Investments Commission (the conduct regulator) and the Australian Prudential Regulation Authority (the prudential supervisor for banks, insurers and superannuation funds).

Compliance with the law should not be a matter of choice, he says. The law is there to be obeyed and enforced. The question for ASIC is why it would not prosecute apparent breaches of the law, not whether it should.

It is hard to argue against more vigorous enforcement and prosecution. Yet breaches of the law – or even the law itself – are not always as clear-cut as in the royal commission's compelling case studies. And, more than Commissioner Haynes concedes, prosecutions can be frustrated by the inefficiencies of the lawyer-captured court system.

Commissioner Hayne begins the process of reforming Australia's superannuation system by calling for "one default account" so that individual workers do not collect multiple fee-paying accounts as they change jobs or industries.

But his report fails to come to grips with the conflicts of interest embedded in the award-based compulsory superannuation system. That encourages union-based industry funds to politically lobby for a system that maintains their institutionalised privileges. [The only financial sub-sector that wasn’t caught defrauding its clients wholesale, you mean? Funny, that. –RJB]

And, while favouring enforcement over more regulation, Commissioner Hayne will lead to an extension of the highly-intrusive Banking Executive Accountability Regime across the rest of the financial services sector. But putting bureaucrats into the remuneration committee invites confusion.

As the final report admits, there is no ideal or optimal system for rewarding bank executives. As the Commonwealth Bank has found out, this can too easily become a vehicle for inserting socially fashionable objectives into commercial activities.

It would be a pity if such over-reach sullies the Commissioner's compelling core insight that those who claim to act in their customers' interests must do so.

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