Today the hotly anticipated 951 page final report of the Financial Services Royal Commission (Final Report) was released to the public.
It was submitted by the Commissioner, the Honourable Kenneth Hayne AC QC, to the Governor-General and the Treasurer on 1 February 2019. This follows an Interim Report which was released on 28 September 2018 that highlighted the Commissioner's broad key observations to date.
This is an initial overview of the Final Report and is the first in a multi-part series by Clyde & Co looking at the wider implications of the Financial Services Royal Commission.
Key summary of the Final Report
- 76 recommendations made by Commissioner Hayne.
- 19 instances of possible misconduct covering 24 different civil or criminal offences across 22 entities.
- Invitation to the Australian Securities and Investment Commission (ASIC) to consider whether criminal or other legal proceedings should be instituted for certain conduct (although specific entities or individuals not named).
- Fees-for-no-service scandal will see at least AU$850 million paid in compensation.
- Establishment of a new oversight body for ASIC and the Australian Prudential Regulation Authority (APRA).
The Australian Government has agreed to take action on 75 of the 76 recommendations. It has held off, for now, on fully implementing a suggested crackdown on mortgage brokers, on the grounds that it could harm competition. The Government has also announced an AU$30m compensation scheme of last resort to pay victims of misconduct by institutions which no longer exist.
It will come as no shock that Commissioner Hayne considers the industry needs an overhaul. In his own words:
“Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them.”
“…there can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management…every financial services entity, named in the Commission’s reports or not, must look to its culture.”
Despite some strong words of general criticism for the industry, the recommendations made by Commissioner Hayne are not the wholesale rewrite of the Australian financial services system that some had been predicting. The Final Report makes a large number of recommendations but by and large those recommendations are for change within the existing system rather than a complete restructure of it
The Final Report makes specific findings in relation to the misconduct of entities that have appeared before the Financial Services Royal Commission, as well as broader recommendations for the financial services industry. There is also a call for stricter monitoring by regulators, which will now likely be highly scrutinised for their management of financial services misconduct.
The 76 recommendations have been grouped together under the following general subject matters. Some of the key recommendations are:
- new duty for mortgage brokers to act in the best interests of borrowers, the breach of which would carry a civil penalty;
- mortgage broker commissions should be banned over a period of 2-3 years, starting with trail commissions on all new loans and then all other commissions; and
- mortgage brokers to be subject to the same laws that apply to financial advisers who give personal advice.
- all ongoing fee arrangements must be renewed annually by the client;
- financial advisers must disclose their lack of independence to clients;
- grandfathered commissions should be repealed as soon as reasonably practicable;
- removal of commissions on life insurance;
- exemption of general and consumer credit commissions should be reviewed;
- any financial adviser who provides personal financial advice to retail clients should be subject to a single, central disciplinary body; and
- review of the implementation of these measures in 3 years' time.
- superannuation trustees should be prohibited from assuming any obligations other than those arising out of their duties as a trustee of that superannuation fund;
- the deduction of any advice fees from any MySuper account should be prohibited;
- the unsolicited offer or sale of superannuation (i.e. hawking) should be banned;
- a person should have only one default superannuation account;
- superannuation trustees should be banned from "treating" employers to have their fund nominated as the default fund; and
- the Banking Executive Accountability Regime (BEAR) should be extended to superannuation trustees.
- replacement of the duty of disclosure under the Insurance Contracts Act 1984 (Cth) with a duty to take reasonable care not to make a misrepresentation to an insurer in consumer insurance contracts;
- hawking of insurance products should be banned (in line with the recommendation on superannuation);
- the unfair contract terms in the ASIC Act 2001 (Cth) should apply to insurance contracts; and
- the handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’.
The Final Report also addressed issues around culture, governance and remuneration within the financial services industry as a whole. Specifically, Commissioner Hayne recommended that APRA should give effect to the sound management of financial risk and misconduct in its supervision of bank remuneration systems, and that banks should conduct annual reviews of the design of remuneration for front-line staff.
Regulators themselves have not escaped criticism, although Commissioner Hayne acknowledged that the 'twin peaks' model of financial regulation in Australia (i.e. APRA and ASIC) should be retained. However, he has called for ASIC to take a stronger enforcement approach, including using infringement notices for administrative failings only and rarely as an enforcement tool for large corporations. Overall, Commissioner Hayne recommends a new oversight authority for APRA and ASIC, independent of government, to assess the effectiveness of each regulator.
What can we now expect?
Although the Final Report has only just been made public, there is little doubt that the Commissioner's findings, recommendations and comments will give rise to further claims against financial services entities, in addition to those already on foot, as well as an increase in the enforcement activities of APRA and ASIC.
We can likely expect:
- Increased claim activity (existing and new litigation).
- Significant focus on misconduct of mortgage brokers and financial advisers.
- Greater enforcement activity by APRA and ASIC.
- Generally, no immediate increase in regulation but a bolstering of the existing framework.
We are continuing to follow developments in relation to the Financial Services Royal Commission, and we will be releasing a series of publications to the market giving an in-depth commentary on the Final Report and possible repercussions for the financial services industry and beyond.