- The interim report from the financial services royal commission has been released today, with commissioner Kenneth Hayne declaring “greed” was the primary motivator for bad behaviour in the banking industry.
- He also pointed at lax enforcement by regulators as a reason misconduct thrived.
- The initial report does not tackle superannuation, insurance and other issues currently being investigated before the hearings wind up in late November ahead of the full report due on February 1 next year.
The Financial Services Royal Commission interim report is out.
It is damning about the culture of greed in the banks and the failures of regulators based on the first four rounds of hearings in Melbourne, Brisbane and Darwin between March and July. The report considers issues such as bank lending, fees for no service, and commissions paid to both banking staff and other industry advisors as incentives to sell products.
Further topics, including superannuation and insurance, which the royal commission looked at in hearings in August and September 2018, will feature in the final report due by 1 February, 2019.
Markets are still digesting the report but the early indications are that it’s not as bad as some thought it could have been for the banks.
Richard Coppleson, director of institutional sales at Bell Potter, told Business Insider that it “looks at a glance that the banks have (at this stage) got off lightly”.
The market responded with financial stocks surging 2% following the report’s release.
Here’s part of what commissioner Kenneth Hayne says in his executive summary for today’s interim report addressing how the multiple failures in banking occurred.
Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained? But it is necessary then to go behind the particular events and ask how and why they came about.
Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.
When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court. Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct.
Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.
Turning his attention to how to prevent the conduct happening again, Hayne says that as the commission’s work continued “entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements”.
They range from refunds and remediation for customers, selling off divisions that have been a problem, scrapping products and an increased focus on regulation and enforcement.
“The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’. Much more often than not, the conduct now condemned was contrary to law,” Hayne says.
“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?”
In the 345-page, 112,000 word first volume of the interim report, Commissioner Hayne addresses the difficulty he had in getting two of Australia’s big four banks to respond to his requests for information has the commission got underway. He wrote to the big four, plus AMP, seeking “a detailed and comprehensive list” of conduct in the previous five years that they considered “misconduct” in the context of the commission’s terms of reference.
“CBA and NAB found it difficult to comply with the requests that I made,” he said, because there were so many different sources.
It led Hayne to ultimately conclude “that neither CBA nor NAB could readily identify how, or to what extent, the entity as a whole was failing to comply with the law”.
And if that is right, neither the senior management nor the board of the entity could be given any single coherent picture of the nature or extent of failures of compliance; they could be given only a disjointed series of bits of information framed by reference to particular events.
Information presented in that way points too easily towards explaining what has happened as ‘a small number of people choosing to behave unethically’ or as the product of ‘people, policies and processes that existed with a pocket of poor culture in that area at that time’.
The extent to which these issues extend beyond CBA and NAB remains to be explored, Hayne says.
Turning his attention to financial incentives to sell bank products, the commissioner says: “remuneration arrangements for third party intermediaries and for all staff, both frontline staff and senior executives, have rewarded sales and profitability”.
Doing the ‘right thing’ has not been rewarded. And even in the more recent past, ‘balanced scorecards’ and ‘conduct gateways’ have too often used doing the ‘wrong thing’ as a disqualifying criterion. But penalising default is not the same as rewarding the right and proper performance of a task. Penalising default encourages hiding mistakes; it does not encourage doing the ‘right thing’. It does not encourage the intermediary or the employee to ask, ‘Should I, should the Bank, do this?’
The Commission is now seeking submissions in response to the issues raised by October 26.
The next and final rounds of hearings will be held in Sydney (Nov 19-23) and Melbourne (Nov 26-30) ahead of the final report in February next year.
The full report is here.
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