On the back of a string of damning inquiries by APRA, the ACCC, ASIC, and the Productivity Commission, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has focused heavy attention on the banking sector.
As class action law firms circle and commissioner Kenneth Hayne prepares to present his interim report, it seems timely to reflect on the changes banks have already introduced since the royal commission was first raised in earnest.
Banks have been at pains to get across the message that they have already made meaningful reforms. The major threads in this reform narrative are as follows.
Righting past wrongs: All major banks have proactively entered remediation programs to repay customers who received improper advice and were exposed to unfair fees.
The Big Four and AMP have paid more than $200 million in compensation for fees for no service and more than $50 million in compensation for non-compliant conduct by financial advisors. A number of major insurers have followed suit and are set to refund $118 million to people who bought junk add-on insurance products from car dealers.
Collectively, these actions point to areas where the banks feel most exposed and to where they feel the commission is leaning.
Spinning off wealth: ANZ was the first of the Big Four to announce its retreat from wealth management last year, selling that part of its business to IOOF. NAB has since indicated it will sell off its wealth management and financial advice arm, MLC.
CBA intends to demerge its wealth management and mortgage broking business from its banking operations and amalgamate them under a new CFS Group banner.
Westpac, until now the staunchest opponent to the dismantling of 'vertical integration', is purportedly considering its options with respect to its financial advice arm, BT Financial. In addition to structural changes, various 'junk' products have been discontinued.
Executives have attempted to spin these decisions as a necessary 'simplification' of their businesses. This may be a case of colliding interests, but the changes clearly reflect concerns raised about conflicts of interest and lack of accountability.
Tightening lending: Despite a growing media story about the royal commission increasing housing prices, it should be noted that since 2014, APRA has significantly tightened lending standards, requiring banks to assess borrowers' ability to repay loans at an interest rate of at least 7%.
The share of new loans exceeding 80% of the purchase price has declined sharply in response, and overall credit growth has slowed. The entire banking sector has moved against interest-only loans and tightened procedures around proving capacity to pay.
Earlier this year, the Australian Banking Association updated its code of practice to provide greater protection to consumers and small businesses in their dealings with lenders. This revised code is scheduled to take effect from mid-2019, and has been approved by ASIC subject to the findings of the royal commission.
NAB has also taken steps in relation to its 'Introducer program' to minimise the risk of impropriety and conflicts of interest. The program came under heavy fire during the royal commission. NAB's actions have included the appointment of a compliance team, increased training, and enhanced reporting systems. These actions mirror those promoted by all major banks.
Reconfiguring remuneration: Recommendations by the Sedgwick Banking Remuneration Review and ASIC Broker Remuneration Review have already had impact on the industry. The Combined Industry Forum – an industry body representing banks, mortgage brokers and lobby groups – has agreed to cease paying commissions to mortgage brokers based on the volume of loans.
In August 2017, NAB moved to a 'short-term incentive plan' where employees' bonuses are reduced if conduct requirements are not met. More recently, Ken Henry has outlined more substantial changes to the NAB remuneration framework focusing on balancing customer and shareholder interests. These sentiments have been echoed elsewhere across the major banks.
The government has also been proactive in this space. Late last year, it introduced the Banking Executive Accountability Scheme (BEAR). This scheme imposes limitations on the structure of remuneration for executives, with the goal of incentivising them to consider medium to long-term risks.
Once all aspects are in force next year, 40% to 60% of senior executive bonuses will need to be deferred for at least four years. The impact of this scheme may be minimal, as the focus is prudential rather than being concerned with misconduct and conflicts of interest, and banks were already heading in this direction prior to the enactment of BEAR. Both Westpac and Macquarie Group claim to already be fully compliant.
Collectively, these actions point to areas where the banks feel most exposed and to where they feel the commission is leaning. All major banks have been vocal in trumpeting their voluntary remedial action, but they have some nervous months ahead.
They will have to wait until the royal commission final report in February 2019 to see if they have gone far enough, and if not, how much further they must go.
Clinton Free is a professor at UNSW Business School. Hannah Harris is a research fellow at the UNSW Centre for Law Markets and Regulation, where Aaron Irving is also attached.