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Hayne's final report on the Banking Royal Commission has been released; below we summarise his position and the initial speeches and responses for your convenience. 

The report is being hailed as a restrained bookend to a year of public flogging and reputation damage.

It would appear the Government, and Commissioner Hayne, are trying for a “Goldilocks” public outcome. 

Today's report stopped short of inflicting the worst reputational outcome of referring specific individuals to the DPP to face criminal charges. While criminal charges may still follow, the Commission held back from the easy hit of naming names under the blinding glare of the media spotlight.

This restraint may well be about system stability. With a vulnerable economy, the Royal Commission has, in part, been blamed for a slump in lending as credit tightens. Can we afford to have the Australian public lose more confidence in the pillars of our financial system? Probably not.

The devil will be in both the detail of implementation, and the broader brushstrokes of real industry cultural change. Commissioner Hayne has little confidence in the way the system is now, so change must be mandated. That change has to be real, and inside-out, not a bandaid exercise. 

The sort of change we could see emerging, as it relates to reputation, includes:

  • A more sound and systemic approach to reputation risk - reputation is important to the whole system’s stability and sustainability, and critical to the survival of individual financial services organisations.
  • Far greater heed to marginalised or “outer ring” stakeholders - the disadvantaged, the whistleblowers and those whose voices have not always been heard.
  • Greater weight placed on individual outcomes and stories - the real human impact of industry actions, versus the KPIs and corporate scorecards which are lead indicators for P&L outcomes, executive remuneration and shareholder returns.

Rebuilding trust, and keeping it, will be tough.

Regaining community confidence will take serious change - in both business practices and how leaders think about, and act on, reputation risk.

In the days and weeks to come we’ll look at the implications for leaders.

Full Report Executive Summary[Full version here]

  • In opening the report, Hayne lays out four key issues that have become central to his observations and recommendations: the connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account.
  • He goes on to explain that none of these issues can be taken on its own: in each case, it wasn’t only the organisations that drove behaviour, but individuals’ pursuit of gain.
  • Gain could be defined as the pursuit of remuneration or profit, meaning service was relegated to second place – and roles were merged.
  • Hayne points out that sales became so important that all functions merged: this led to roles becoming merged: “Those who dealt with customers became sellers… Advisers became sellers and sellers became advisers.”
  • With this as a backdrop, he explains that when the interests of a client, intermediary, and provider of a product or service are not only different but opposed, then “self-interest will almost always trump duty.”
  • This was emphasised by a lack of accountability for institutions that broke the law – Hayne stresses that misconduct will only be deterred if entities believe it will be “detected, denounced and justly punished.”
  • He goes on to outline community expectations, and calls for those breaking community standards to be held to account, beyond “saying sorry and promising not to do it again.. the financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or happen again.”
  • Primary responsibility, Hayne says, must sit with the boards and senior management of the entities concerned, leading to a wider examination of corporate culture and governance.
  • Hayne then recaps the Treasury’s key questions in its written submission to the Interim report, and agrees that these should be the pillars of policy responses to be made. However, Hayne argues changes to the law are also necessary in order to address the asymmetries of power between large financial institutions and consumers.
  • On extending the Commission, Hayne writes that he didn’t seek an extension as his duty is to execute the demands promptly. He used case studies to illustrate the emergence of general issues or types of conduct that were seen to be emerging.
  • Hayne recaps the six norms of conduct identified in the Interim Report:
    • Obey the law
    • Do not mislead or deceive
    • Act fairly
    • Provide services that are fit for purpose
    • Deliver services with reasonable care and skill and
    • When acting for another, act in the best interests of the other.
  • These norms of conduct reflect general rules on:
    • The application and enforcement of the law
    • Industry codes
    • Hawking
    • Intermediaries
    • Exceptions to the ban on conflicted remuneration
    • Culture and governance practices (including remuneration arrangements)
  • Hayne then commences with recommendations, as summarised in the AFR.

The Treasurer's introductory speech (summarised)

  • Addressing the media in Canberra, Josh Frydenberg said the Royal Commission final report is a “scathing assessment of conduct, driven by greed and behaviour that was in breach of existing law and fell well below community expectations.”
  • Revisiting some of the examples of misconduct uncovered in the seven rounds of public hearings, Frydenberg stated “who could forget the appalling audio recording of a young man with Down syndrome being subject to high-pressure sales tactics, resulting in the purchase of a financial product he clearly did not want, need or understand.”
  • Frydenberg says this story and the other stories heard by the Royal Commission show that the community’s trust in our financial institutions has been lost and must be restored. He quotes Commission Hayne’s 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.'"
  • The Government is “taking action” on all 76 recommendations contained within the final report and even going further in some respects e.g. the establishment of AFCA, BEAR, the review of APRA, and by providing extra resources for the Federal Court to expedite misconduct cases.
  • The Government’s principal focus is on “restoring trust in the financial system and delivering better consumer outcomes – while maintaining the flow of credit and continuing to promote competition.”
  • Frydenberg’s message to the financial sector today is that misconduct must end, and the financial services sector must put the interest of consumers first. Consumers must be treated honestly and fairly. His message to the Australian community today is that “your government is committed to making this happen.”
  • The government’s response advances the interests of consumers in four key ways:
    • Strengthen and expand protections for consumers, small business, rural and remote communities.
    • Raise accountability and governance standards.
    • Enhance the effectiveness of regulators.
    • Provide for remediation for those harmed by misconduct.
  • Frydenberg thanked Commissioner Hayne for the manner in which he conducted the Royal Commission and the tireless work of all those involved. He also acknowledged the individuals who provided submissions and came forward to give evidence. Their stories and experiences drive home the necessity of immediate change.
  • Frydenberg is adamant that the Liberal government is taking action to create a “brighter future for 25 million Australians when they're dealing with their financial institutions.”
  • When asked if the Liberal government had let Australians down by opposing a financial services Royal Commission for 16 months, Frydenberg noted that when Labor was last in office, they did nothing and had major financial collapses on their watch, repeating that the Liberal Government is taking action on all 76 recommendations.

The Opposition's speech (summarised)

  • Shadow Treasurer Chris Bowen spoke briefly, stressing the party had only had the report for a few hours.
  • He said that, like the Government, Labor would accept – in principle – all of Hayne’s recommendations, calling them “the minimum action that should be taken”. Labour would have a treasury task force to consult broadly and widely about implementing the changes.
  • He also said that it was appropriate today to recognise both those who worked hard to execute the Commission, and those whistle-blowers, “who in many instance paid a very big price for their bravery”, that set the ball rolling.
  • Bowen said Morrison and his government “should hang their heads in shame that they voted 26 times to avoid this report” and called it "a dark day for Australia's banks and financial institutions.” He stressed too, that the Government “cannot say they’ve accepted the recommendations” and that implementation of the report must be publicly transparent.
  • He assumed a slow road to implementation, saying that, while he was sure that there are elements that would receive bipartisan report which could be implemented immediately if the sitting government was competent, this would likely not happen due to a “part-time government”.
  • He said there were “weasel words” in the government’s response, a phrase used by many others over the course of the Commission. 

Immediate market responses?

Last week, it was announced that the big 4 banks (and their smaller competitors) were not allowed to access the final report before its release to the public today. It’s likely we’ll see their responses tomorrow.

  • The Australian Banking Association’s Anna Bligh stated the failures by the sector uncovered in the royal commission "have caused deep hurt, suffering and heartache for far too many customers". "Banks are determined to learn the lessons, to fix the problems, and to make it right. The banks accept full responsibility for these failings, and they must now change to make sure this never happens again. Australians expect better…and…deserve better. Today's report contains some very tough medicine for banks, including potential court cases.”
  • The Australian Prudential Regulation Authority’s Wayne Byrnes saidAlthough the Commission has assigned some important new responsibilities to APRA, our primary responsibility remains the safety and stability of the financial system…[as] the only regulator with a primary focus on ensuring the safety and the soundness of the financial system.”
  • Association of Superannuation Funds of Australia’s CEO, Dr Martin Fahy said that, in essence, the proposed reforms amount to a strengthening of conflicts management and regulatory frameworks, which seeks to ensure that members’ best interests are at the heart of all trustee determinations: "Reforming the system…will build consumer trust and confidence…The Commissioner has acknowledged that the regulatory architecture underpinning our system is strong and that the “best interests” covenant, and “sole purpose” test set high standards for trustees operating superannuation funds.”
  • Australian Institute of Superannuation Trustees’ CEO, Eva Scheerlinck, welcomed Hayne’s emphasis on the need for retail super fund directors to abide by the best interests’ duty, which included a key recommendation for civil penalties to apply if this duty is breached: “What we saw…were examples of an absolute betrayal of…customers who trusted them with their superannuation. Directors who ignore their duty to act in members’ best interests need credible deterrence to bad behavior, so civil penalties are long overdue.”
  • Industry Super Australia says the Commission shone a welcome light on serious conflicts within the system and validated the important role that industry and other profit-to-member super funds play in safeguarding Australians' retirement savings: “That not-for-profit industry superannuation funds have emerged from the process relatively unscathed, is vindication of our governance structure and member-first ethos…The system must be more transparent and more accountable – it shouldn’t take a Royal Commission for workers to see whether their retirement savings are in safe hands or not.”
  • Insurance Council of Australia said it and its members “pledge to do better and to continue to be held accountable”, calling it an opportunity “to start afresh, improve business practices and cultures, and put customers at the forefront of our thinking. Repairing public confidence in general insurance is essential if we are to continue to provide effective and efficient risk-based products...”
  • The Responsible Investment Association Australasia says the industry must reflect upon its purpose "and do more to service and benefit the Australian community”, saying the Commission revealed incidences that “devastated the lives of many Australians, and highlighted diverse failings of our sector. This is a watershed moment for the finance sector. The industry and entities involved must reflect and remedy these wrongs, and address the gaps spanning leadership, culture and systems."
  • Financial Services Council (FSC) CEO Sally Loane welcomed the report, saying the industry "must be free of misaligned incentives, mismanagement and poor governance, and focused solely on protecting the savings and growing the wealth of all Australians…all of us have an opportunity to rebuild the trusted relationship and the ties between financial services and the community that were once a bedrock of Australian life.”

  • ASIC Chair James Shipton acknowledged that "The report identified ASIC's enforcement culture as the focus of change needed at ASIC” and that it noted “the serious matters…of possible breaches of financial services laws.”

Media opinions on the report

Other news

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