Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry certainly lived up to its name.
Across 68 sitting days, with 130 witnesses and 10,000 public submissions, ongoing revelations of systemic misconduct and unethical behaviour were rife.
Exposed was a toxic culture of customers being ripped off, as if they were acceptable collateral damage in a shameless pursuit of short-term profits and shareholder returns. Disadvantaged customers were particularly vulnerable and even dead clients were charged fees.
Commissioner Kenneth Hayne, normally so understated and forensic, appeared exasperated by the extent of rampant greed and blatant conflicts of interest.
His three-volume final report includes 76 recommendations for reform and refers 24 cases to regulators for civil and potentially criminal breaches of the law.
Pamela Hanrahan, a professor of commercial law and regulation at UNSW Business School, was an expert adviser to the commission. She reflects on her experience with BusinessThink.
What exactly was your role?
I was the author of three of the background papers published by the commission – one on financial services, one on superannuation, and one on foreign financial regulation.
Which of the many revelations did you find most disturbing?
They were all pretty disturbing. I think the most shocking aspect of it wasn't just a question of people being engaged in sharp practices, or behaving in a way that with the benefit of hindsight you might not think was the best way to behave, but actually that there was widespread failure to comply with legal requirements.
Are the existing rules of conduct too complicated to follow?
They are not too complicated to follow, but they are unnecessarily complicated and there are lots of special exceptions and special qualifications to the regulations and that diminishes the normative force of the rules. The Commissioner thinks the law would benefit from being simplified. So, being less technical and more focused on the actual forms of behaviour that you want to encourage.
How has the sector got itself into this mess, again?
The Commissioner says it's because it has been too focused on performance, both at the corporate level and also at the level of individual incentives, and has lost sight of the fact that they need to achieve that result in a way that is compliant with law and serves the interests of customers.
Many financial services now provided to households are not that old and have really emerged during the past 25 years. The industry has grown very rapidly. We now have a situation where there are big organisations and big systems and it has got away from us.
'It's the forensic process of examining their businesses and their business models that will have the most long-term impact'
– PAMELA HANRAHAN
How likely are prosecutions from the 24 cases referred to regulators?
I think it's likely that there will be prosecutions because, aside from everything else, there's significant community and political pressure on regulatory agencies to take that option wherever it's available.
What are the suggested new powers for the regulators, ASIC and APRA?
ASIC has already been promised significant new powers and that legislation has been in the parliament since July last year. It's likely that will pass, strengthening the penalties and giving them more options. ASIC has also received additional resources and personnel during the past year.
They have new powers to come, but it's less an issue of not having adequate powers rather than not having exercised them. I think that's the clear finding in the report. So in order to whip them into shape, the Commissioner has recommended establishing a three-person oversight body.
He could have recommended the establishment of an independent board for each agency, which is used in other places. But he's gone in the direction of three part-time members, with a quite specific mandate to assess effectiveness and performance and report to government. You have to wonder how effective that's going to be in practice.
Why do you think Hayne did not mandate a structural separation between financial products and advice?
He does talk at length about a conflict that is very difficult to resolve, which inclined him to think that maybe we ought to require structural separation, and he talks about different options. And then he says that almost none of the submissions, including from ASIC, recommended separating product and advice, and that it would cause very significant disruption.
So, consistent with the rest of the report, which is conservative in nature, he takes the view that unless he's persuaded that the benefits of separation would outweigh the costs, he should leave the reforms already in train, and industry restructuring, to run their course.
'Hopefully, their customers will realise that the bank is not there to help them and they have to be vigilant in their own interests'
– PAMELA HANRAHAN
Mortgage brokers will lose trailing commissions in three years time. Why were they singled out?
They face the same problems that financial advisers faced and which was attempted to be addressed in the Future of Financial Advice (FOFA) reforms five years ago, where the commissions were banned for them. So it's the same issue in that you've got intermediaries, clients go and see them, ask for assistance in selecting the best financial products and believe, perhaps naively, that the mortgage broker is there to negotiate the best deal for them. But the product issuers are paying the mortgage brokers to do it and that creates a potential conflict of interest.
I think the Commissioner has concluded that existing arrangements around mortgage broking are detrimental to the community overall and they need to change.
Bank stocks and profits have soared since the release of the report. Will its implications just be a cost of doing business?
No, but the banks will have to change their approach. Of course, from bank shareholders' point a view, the report could have been much more radical than it was. And I think that had been built into the market price.
Regardless of the recommendations, it's the forensic process of examining their businesses and their business models that will have the most long-term impact. But this is the 70th inquiry that we've had in 10 years. Are we going to learn the lessons this time?
Banks are stubborn. They are very large, very powerful and are very resistant to change. They have complex systems. It's like turning around the Queen Mary. So it's going require a lot of effort – right from boards, which will have to think very carefully if they've got the right CEO, and the right business – because we can't go through this again. And what they'll find, if they don't respond, is that they will just end up being overtaken by new business models and disruptive technologies and so on.
The biggest difference is that, hopefully, their customers will realise that the bank is not there to help them and they have to be vigilant in their own interests. And that would be a significant improvement.