Banking inquiry: financial world holds breath for final report

After 69 days of hearings to comb over more than 10,000 submissions, the final report of the banking royal commission has been handed to the government and will be revealed on Monday.

Treasurer Josh Frydenberg received the report of commissioner Kenneth Hayne QC this morning, and has said he expects it to make recommendations on fee structures, responsible lending, the role of regulators, and conflicted remuneration.

The inquiry has heard of widespread misconduct - including the charging of dead people and fees for no service - from some of Australia's most revered financial institutions.

The effects have already been far-reaching. Executives from 170-year-old insurance giant AMP Capital have been forced out and it has become harder to get a loan as banks tighten lending standards.

Kenneth Hayne QC: banks have gone to the edge of what was permitted and beyond

Share prices have suffered too, most notably that of AMP, which has fallen almost 60 per cent over the past year. The big four banks have registered more modest falls, of between 12 and 20 per cent. However, Morningstar's fair value estimates for the big four remain robust, falling by between 3 and 6 per cent over the past year.

 Then and now: changes in share price/fair value estimates of AMP and big four

Source: Morningstar

Although not directly attributable to the inquiry, several banks have ramped up plans to divest parts of their wealth management operations.
Vertical integration, whereby institutions both own create and sell financial products, has been a key theme throughout the inquiry. The banks' retail arms, insurance divisions, and super funds have all been implicated in cases in misselling and other misconduct.

Key areas of the banking royal commission's final report

GREED

Hayne has blamed greed for widespread misconduct. Short-term profit has been pursued at the expense of basic standards of honesty, his interim report said.
Hayne said the banks had gone to the edge of what was permitted and beyond that limit because they could and because they profited from the misconduct.

FEES FOR NO SERVICE AND CHARGING DEAD PEOPLE

The interim report was scathing about the $1 billion problem of customers being charged fees for financial advice when no service was delivered. The conduct was both dishonest and inexcusable, Hayne said. The final report will likely again focus on the problem, accelerating the payment of compensation and improvements in systems to prevent it happening again.
Following the interim report, the Australian Banking Association announced changes to its new industry code to end fees for no service and stop charging deceased estates.

REGULATION

The financial services companies appear to believe the law only applies when and if they chose to obey it and weak regulators have let much of the misconduct go unpunished, the interim report concluded. Hayne wants financial services laws obeyed and enforced by strong regulators, rather than bringing in new laws. "Passing some new law to say, again, 'do not do that' would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?"

THE REGULATORS

Hayne slammed ASIC and APRA for failing to mark and enforce the bounds of permissible behaviour, saying the misconduct either went unpunished or the consequences did not meet the seriousness of what occurred. Both regulators have pledged to be tougher.
ASIC now plans to take criminal and civil action more often, rather than negotiating resolutions with the big banks and others.

RESPONSIBLE LENDING

It has become harder to get a loan as regulators made banks tighten lending standards and the royal commission put the focus on ensuring money is lent responsibly.

The availability of credit will likely be further restricted after Hayne's recommendations.

Banks will have to do more to verify customers' income and their actual living expenses, rather than relying on the widespread use of benchmark expenditure measures.

Issues with responsible lending extend beyond mortgages to include car loans, credit cards, personal loans and add-on insurance.

REMUNERATION

Australia's banks face pressure to radically change the way they pay staff including senior executives after Hayne slammed the emphasis on rewarding sales and profits.

The major banks all made changes to their remuneration practices after the independent Sedgwick review in 2017 recommended an overhaul, although the royal commission's interim report noted they continued to emphasise sales.

The recommended changes will likely cover all bank staff, not just senior executives.

Hayne may recommend big changes for brokers and other intermediaries in the home loan industry.

He said reforms to broker remuneration agreed to by the industry, such as eliminating volume-based commissions, are limited and do not deal with the basic problem of people being encouraged to borrow more than they need.

Financial advisers also face potential changes to their remuneration, most notably over grandfathered payments and trail commissions.

INSURANCE AND SUPERANNUATION

The final report will also have significant ramifications for the insurance and superannuation industries, including their regulation.
Hayne has been considering whether cold calls to sell insurance should be banned and if some types of policies such as accidental death products should not be sold.

KEY SHOCKS AND REVELATIONS FROM THE BANKING ROYAL COMMISSION

THE $1 BILLION FEES-FOR-NO-SERVICE SCANDAL

The interim report was particularly scathing over the large and endemic fees-for-no-service problem, which he labelled dishonest and inexcusable. The corporate regulator expects compensation will exceed $1 billion for customers charged for advice they never received.

AMP suffered the biggest fallout over the scandal, while the Commonwealth Bank earned the dubious title of the "gold medallist" for charging customers for financial advice they never received.

CHARGING DEAD PEOPLE FEES

Three of Australia's biggest financial players have admitted charging dead customers amid the wider fees-for-no-service scandal.

It involved some CBA advisers, including one who charged a dead client's estate for more than a decade, a CBA superannuation business and NAB super trustees deducting fees from deceased members' estates.

AMP charged thousands of dead superannuation customers for life insurance, despite knowing there was no longer a life to insure.

THE AMP SCANDAL

The fees-for-no-service scandal revealed at the royal commission in April claimed the jobs of AMP's CEO and chair, led to a share price slump and sparked shareholder class actions.
The inquiry's barristers recommended Australia's largest wealth manager face criminal charges for lying to ASIC. Hayne in his interim report said AMP adopted an attitude towards the regulator that appeared to him not to be forthright and honest, but he left the matter in ASIC's hands.

WITNESS COLLAPSES

Dover Financial Advisers sole director Terry McMaster sensationally collapsed while giving evidence to the royal commission after being accused of lying. Dover later agreed to stop providing financial services and McMaster permanently left the industry.

AGGRESSIVE SALES TACTICS

After Freedom Insurance pressured an intellectually-disabled young man with Down syndrome into buying insurance over the phone, his father struggled to get it cancelled.
He eventually had to get his son on the phone to say he wished to terminate the policy, with a recording clearly showing him struggling to articulate the words let alone understand them.

Financial company ClearView admitted it committed criminal offences by making 300,000 unsolicited cold calls to sell life insurance.

The inquiry also heard about the aggressive tactics of financial entities pushing inappropriate funeral insurance, high-interest loans and other products on to Aboriginal people with poor financial literacy. Hayne said in relation to funeral insurance, the evidence pointed to predatory behaviour by insurers and salespeople.

FARMERS

The inquiry heard emotional stories of farmers' problems with banks, including some drought-stricken graziers being hit with hefty penalty interest for defaulting on their loans.
ANZ's 2010 acquisition of Landmark also featured, with Hayne finding the bank was ill-prepared to deal with farmers facing hard times and did not understand their emotional connection to the land.

SMALL BUSINESS

The commission also examined problems faced by small businesses, but former Bankwest customers who complained about their treatment by CBA were left disappointed.

Hayne concluded none of the several different reasons advanced in support of the allegation CBA deliberately engineered defaults of business loans made by Bankwest holds water.

THE COMMINSURE SCANDAL

CommInsure faced up to $8 million in fines over misleading ads about trauma coverage for heart attacks but walked away with a $300,000 "punishment" - in the form of a community donation - with the regulator's blessing.

CommInsure apologised for wrongly denying a breast cancer sufferer's insurance claim because she did not meet its outdated definition of radical breast surgery involving removal of the entire breast.

HOME LOAN FRAUD

A syndicate of National Australia Bank staff took $2800 bribes for fraudulent home loans with the money exchanged in white envelopes passed over the counter, the inquiry heard.