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The Hayne Royal Commission: Findings, Responses and Future

March 18, 2019
Editor(s): Matthew Trachevski
Writer(s): Anthony Wong, Laukik Parulkar, Preethika Padmanabhan

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, also known as the Hayne Royal Commission, has unearthed some of the most damning industry practices of the past decade. Naturally, these discoveries only further perpetuate the age-old stereotypes of banks, hedge-funds and insurance companies as greedy corporate monoliths that strive for profits at all costs. With the findings and condemnations of the Royal Commission spanning into most sectors, it would be apt to question the current state of ethics in the financial services industry and to brainstorm the changes necessary within the boardrooms of these companies.

Beginning on the 14th of December 2017, the Hayne Royal Commission conducted seven rounds of public hearings over 68 days, called over 130 witnesses and reviewed over 10,000 public complaints 1. In his final report, Justice Hayne provided 76 “sweeping recommendations”2 on how to proceed, yet there seems to be a sense that the perpetrators are coming out of the commission ‘scot-free.’ Notably, Hayne’s report did not name any specific entity or individual to face criminal charges, but instead called upon regulating bodies to take on this responsibility3.

Findings

The findings of the Royal Commission clearly demonstrated widespread misconduct within the financial services industry; none of the Big 4 banks escaped scrutiny along with a number of other companies within the superannuation and insurance industries.

  •  National Australia Bank (NAB) was found to have been involved in a fee-for-no-service scandal along with the other Big 4 banks. They were found to have charged over 200,000 customers, over 100 million dollars in fees even though they did not provide any financial advice4. On the witness stand, NAB CEO Andrew Thornburn attempted to portray this as a simple “administrative error.”

In another incident, NAB-aligned financial advisers misappropriated funds from clients’ superannuation funds and trust accounts without disclosing conflicts of interest – that the authorised representative was a director or shareholder in the company. The bank only notified ASIC two months after the incident occurred when the required time to report a ‘significant breach’ is 10 days.

  • Commonwealth Bank of Australia (CBA) suffered from similarly damning exposés. Their rap sheet included multiple instances where the staff breached anti-hawking laws regarding the sale of business banking services, refused to refund fees charged to victims of fraud, breached privacy relating to customer information and, like the other big banks, were involved in the fee-for-no-service scandal5. Ethics within CBA at the time was probably best exemplified by how then CEO Ian Narev told his then second-in-command and now CEO, Comyn to “temper [his] sense of justice” regarding ‘dodgy’ credit card fees.

However, CBA’s most slimy deed is perhaps the act of continuing to charge fees to customers who had already passed away. The bank has admitted to charging over 3.9 million dollars in fees from thousands of deceased customers.

  • AMP was yet another company that was involved in the ‘fee-for-no-service’ scandal. What stands out about them was the internal policy known as ‘ringfencing’ whereby the bank charged customers without providing any service for up to 90 days after the customer left the bank or an affiliated advisor. Despite internal legal advice deeming the practice as illegal, the policy continued.

In their financial planning arm, AMP was found to have paid or received specific types of commissions long after they were outlawed with the introduction of the Future of Financial Advice (FoFA) reforms on July 1 2013. AMP was also accused of independence issues as board members allegedly interfered with a report by law firm Clayton Utz of which Brain Salter, AMP’s legal counsel was a former partner.

Superannuation

  • NULIS, a trustee of NAB super funds, allegedly “breached its duty to act in the best interest of members” by continuing to deduct grandfathered commissions. They put the financial interests of NAB and its advisors ahead of the needs of their members.
  • IOOF Super fund issued a letter to members explaining the need to claw back over distributions of cash as a “historical distribution error.” This description may have been misleading.
  • Suncorp may have illegally outsourced functions and activities to other group companies. They have been referred to APRA for investigation.
  • Catholic Super fund paid out 2 million dollars to a marketing company linked to the fund’s head of institutional relations. The conflict of interest has also been referred to APRA.

Insurance

  •  Allianz failed to report misleading information on its website and has been referred to ASIC for investigation.
  • CommInsure failed to act in good faith for denying a breast cancer claim, relying on outdated definitions of breast cancer.
  • Youi Insurance engaged in misconduct in the way it handled claims following natural disasters such as floods and bushfires.
  • TAL breached its duty of faith relating to a client with a mental health claim. They were alleged to have used excessive surveillance and bullying tactics.
  • Freedom Insurance had a notoriously difficult process to cancel policies and employed predatory tactics to sell products. One customer, with the surname McDonald had “Old McDonald had a Farm” sung to him on voicemail. Another customer with Down syndrome was sold as many as five policies he did not want, need or understand.

 The findings and evidences led to several high-profile resignations and criminal proceedings, but the question remains as to how the finance industry can redeem itself from this scandal.

 

Into the Future

“Trust is at the core of our financial system and, as we’ve seen; once it’s lost, it’s not easily regained.”

– Treasurer, Josh Frydenberg

 

Deloitte’s survey into the public’s trust in the Banking Sector revealed a very disappointing picture. The general public are certainly losing trust in the banking institutions of Australia. Just 21% of the 2000 people surveyed, feel that the banks have customers’ interests at heart. A shocking number of people (68%) believe that even the regulators are not doing a good enough job of keeping the banks in check. The following chart summarises the findings of the survey.

The commission highlighted how a culture of dishonesty, greed, lack of compassion, and willful ignorance to unethical behaviour has become the norm in our major financial institutions. Hayne declared this as a massive failure of corporate governance6.

The board of these companies ultimately carry the responsibility of creating and maintaining this unsustainable culture. They sign off on the strategy, they appoint the CEO and set their key performance indicators. But of course, bank directors are ultimately appointed by and accountable to the shareholders, who have generally been more than happy over the years to accept the run of record profits, healthy dividends and consequent improvements in the share price, essentially turning a blind eye to how these results were achieved.

Hayne also highlighted the considerable failings of the bank regulators (especially APRA and ASIC), especially the failure to achieve more appropriate civil and even criminal convictions for bank abuses and illegalities. It is a weakness of the regulatory structures that they operate against an incomplete definition of banking and financial transactions – a bank license is not adequately proscriptive, as to transactions, practices and responsibilities. Banks have therefore been able to build these financial conglomerates, mostly ignoring the fundamentally different risks, cultures and possible conflicts in each of the financial transactions.

Genuine reform of banking now calls for a complete rethink, not just an attempt to patch up the existing system, bringing a few convictions as a response to the excesses, abuses and illegalities highlighted by Hayne. There is no point in leaving bank culture pretty much intact, so that, before too long, banks go back to operating the same way they have done all along.

One way to change bank culture may be to change bank boards to be more reflective of other stakeholder interests, perhaps by requiring “public interest directors” to be appointed by regulators and for ACCC supervision to represent customer interests.

The government is already in the process of making laws to increase the influence and powers of the regulatory bodies, ASIC and APRA. The IMF observed that areas of increasing risks, such as cyber, group, conduct, and cross-border, warrant an expansion of resources in certain key functions at ASIC and APRA, such as in enforcement, and the supervision of IT and operational risks, as well as to support strengthened monitoring of foreign activities and co-operation with international regulators. The government must, therefore, ease the budgetary constraints of regulatory authorities so that they expand their resources and attract as well as retain sufficient staff with the requisite specialised skills.

An important task now for the finance industry is to restore trust amongst customers. To that effect, the Deloitte Trust Index has earmarked in the following chart what the customers expect from banks to rebuild the trust that was lost during Hayne’s investigation.

The sustained practice of forensically examining their businesses and their business models will have the most long-term impact on the culture in financial organizations. Banks are stubborn institutions. They are very large, very powerful and are very resistant to change. They have complex systems. 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. They will realise that, if they don’t respond in a tangible manner, they will just end up being overtaken by new business models and disruptive technologies7.

The biggest hope is that after Hayne’s report,  customers will realise that financial institutions are profit-seeking entities and that they must be vigilant about their own interests when transacting with these institutions.

References

  1. Commonwealth of Australia. (2019). Restoring trust in Australia’s financial system. Retrieved from https://static.treasury.gov.au/uploads/sites/1/2019/02/FSRC-Government-Response-1.pdf
  2. Commonwealth of Australia. (2019). Final Report: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Retrieved from https://static.treasury.gov.au/uploads/sites/1/2019/02/fsrc-volume1.pdf
  3. Knaus, C. (2019, February 4). Banks may face criminal charges after final royal commission report. The Guardian. Retrieved from https://www.theguardian.com/australia-news/2019/feb/04/banks-may-face-criminal-charges-after-final-royal-commission-report
  4. Eyers, J. (2019, February 5). Banking royal commission: Where NAB went wrong on fee for no service. The Australian Financial Review. Retrieved from https://www.afr.com/business/banking-and-finance/banking-royal-commission-where-nab-went-wrong-on-fee-for-no-service-20190205-h1avui
  5. Danckert, S. (2018, September 7). Revealed: bank royal commission rap sheets made public. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/business/banking-and-finance/revealed-bank-royal-commission-rap-sheets-made-public-20181107-p50elc.html
  6. Hewson, J. (2019, February 20). A few bank scalps won’t help unless they change their rotten culture. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/national/a-few-bank-scalps-won-t-help-unless-they-change-their-rotten-culture-20190220-p50z0b.html
  7. Hanrahan, P. (2019, February 27). Inside view: Will the Hayne Report bring real change? Cuffelinks. Retrieved from https://cuffelinks.com.au/inside-view-hayne-report-real-change/

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Matthew Trachevski
Editor
Anthony Wong
Writer
Laukik Parulkar
Writer

Laukik is a Master of Finance student and a CFA Level 3 candidate. An interest in global economic developments, technological advancements and investment strategies has driven him to pursue a career in asset management. When his head isn’t hidden behind a laptop, he is in the gym doing burpees and mountain climbers!

Preethika Padmanabhan
Writer