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February 4th, 2019 marked a watershed moment in the life of Australia's banking and financial services sectors.
The publishing of the findings from The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, otherwise known as the Hayne report, will force widespread cultural change and alter the landscape of these industries for years to come.
Here, we'll delve into the reports key findings, and the impacts these recommendations may have.
Justice Kenneth Hayne has unveiled 76 recommendations in his damning final report into the Australian financial services sector https://t.co/P9jy6er4CV
— The Sydney Morning Herald (@smh) February 4, 2019
The Hayne report: Key findings
In total Justice Hayne made 76 recommendations in a report revealing gross misconduct and a sales culture that emphasised profit over positive customer outcomes. Here key findings that could impact the risk and compliance industry:
1. Increased regulation: While the report recommended retaining the twin peaks of financial regulation, it also advised an independent body be created to oversee the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). This would ensure that both of these organisations are fulfilling their respective obligations of taking action when institutions break laws, and safeguarding financial stability.
Hayne also pushed for a clearer division between the financial regulators (ASIC, APRA) and the financial institutions and urged ASIC to consider court action for institutions implicated in the so-called 'fees for no services scandal'.
2. Scrutiny of financial advice: Misconduct among financial advisers was a key focus for the commission from the beginning. Particularly damning was evidence of scandals including the charging of deceased individuals for financial advice, and profit motivated promotion of products that weren't in the best interests of the public. The report has sought to deal with such practices through a number of proposals:
A new disciplinary body: To encourage good practice and enable oversight, financial advisors would need to be individually registered, similar to doctors and lawyers. There would be one disciplinary body in charge of punishing misconduct, with the power to deregister offenders.
Repealing of grandfathered commissions: Grandfathered commissions are rolling payments to a financial adviser from an insurance or investment account established before the Future of Financial Advice (FOFA) laws came into action in 2012. The problem here is that, because these commissions comprise a significant element of an adviser's bonus, the temptation was for advisors not to move clients onto better products when they became available. The government has announced that grandfathered commissions will end as of January 1, 2021.
Reduction on commissions for life insurance products: Hayne has suggested that commissions on life insurance products are gradually reduced, and ultimately set to zero as soon as is practicable.
APRA responds to Royal Commission Final Report: https://t.co/c2z6IOdlwI
— APRA (@APRAinfo) February 4, 2019
Changing the relationships between banks and brokers: Similar concerns over conflicts of interest are behind the recommendations made regarding the relationship between banks and mortgage brokers. The most important takeaways are:
Realigning broker priorities: Mortgage brokers who act in the best interests of the bank providing the loan, rather than the borrower, will be subject to fines. As a part of this, the report advises that the borrowers, not the banks, pay the broker for their service.
A ban on trail commissions: In a further attempt to make mortgage brokering more independent, lenders won't be allowed to pay trail commissions to brokers for new loans.
Strengthening Banking Executive Accounting Regime (BEAR): This would make it easier to track any lenders responsible for the breaching of laws.
Simplifying superannuation: The changes to superannuation proposed in the Royal Commission will overhaul several longstanding features of the sector. Primarily they're aimed at reducing fees, and giving people a clearer idea of exactly where their money is:
A single default account - Rather than a new super account being set up every time a worker changes job, Hayne advises stapling individuals to one default account. As well as making it easier for people to keep track of their funds, this will mean employees paying less in account fees.
Abolishing advice fees deducted from MySuper: Funds will no longer be allowed to charge fees for basic advice on MySuper accounts. For other accounts, these fees will be banned in the majority of cases.
Greater oversight: Executives and trustees will face similar scrutiny to banks, and civil penalties would be leveled at those who don't act in the best interests of fund members.
There will be a rising number of risk and compliance roles following the results of the Hayne Report.
What will the changes mean for the sector?
Following the submission of the report to the Governor General, the Morrison government has promised to implement all 76 of Hayne's recommendations. Already, high profile figures such as NAB's chief executive, Andrew Thorburn, and chairman, Ken Henry, have announced their resignations as a result of the findings.
But what will be the long term impacts of the Hayne report?
Cultural change: With widespread misconduct now firmly in the public eye, the banking and finance sector has no option but to change their practices to be more consumer rather than profit focused.
Greater demand for risk and compliance personnel - To ensure that new policies and frameworks are upheld, there will be an increase in risk and compliance roles in the sector. The Commonwealth Bank of Australia (CBA) has already announced plans to employ large numbers of contract roles in this space.
Shifting relationships: It's also likely that these risk and compliance personnel will have a different relationship with companies, taking on more of a partnership role as opposed to acting as external investigators. This is a trend that we were seeing before the Royal Commission, but one that's likely to be accentuated as a result of the findings.
Of course, the desired result of the Hayne report is to prevent any of the failings of the financial services system from being repeated, and to rebuild public trust in the sector. For those entering risk and compliance roles at this time, there's a unique opportunity to be part of a positive change and new start for the industry. If you want to learn more about the changes to the banking and finance sectors in Australia, and the opportunities available to you, get in touch with Ambition's recruitment specialists today.
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