Thoughts on the Banking Royal Commission

Following its release yesterday there have been some mixed reviews and commentary about the final report for the banking royal commission. The below comments from Josh Frydenberg, in my opinion do a good job of summing up why a banking royal commission was needed:

·       “It's a scathing assessment of conduct driven by greed and behaviour that was in breach of existing law and fell well below community expectations”.

·       “There have been broken businesses, and the emotional stress and personal pain has broken lives.”

·       "In Commissioner Hayne's own words, 'There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and their boards and their senior management.'"

Of the key recommendations made, I found two to be particularly interesting:

1.       The Bank Executive Accountability Regime (BEAR) should be extended to all insurers and superannuation funds regulated by the Australian Prudential Regulation Authority (APRA) and be jointly administered with the Australian Securities and Investments Commission (ASIC). BEAR should also be extended to the regulators themselves.

2.       Mortgage broker commissions should be banned over a period of 2 to 3 years, first by banning trail commissions on all new loans and then all other commissions.

Analysis

BEAR is still in its infancy and making executives deal with the regulators in an “open, constructive” way will only help improve the trust in the system. The penalties to executives for a breach under BEAR will hopefully drive the right behaviours from the top. The question is how does APRA and ASIC manage the hundreds of reporting entities in a streamlined way?

Mortgage broker commissions being banned seems counter-productive given the large number of loans settled by brokers. Mortgage brokers have played a key role in driving competition amongst the banks and from personal experience are easier to deal with. Thankfully the government isn’t considering removing upfront commissions for mortgage brokers as a user-pays model would not work and would only reduce competition in the long run.

In summary, the financial services sector needs to build trust with customers, and with the final report being a step in the right direction. The new independent watchdog to police APRA and ASIC can only help ensure the sector rebuilds trust. It will also be interesting to see what impact the rise of neo-banks, as well as the introduction of open banking, will bring to the sector in the near future.

 The final reports are available at: https://financialservices.royalcommission.gov.au/Pages/reports.aspx

BlogDamien Murray