Banking Royal Commission's Final Report - Has It Done Enough?
"Two weeks have passed since the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) was released. The Government has announced that it will ‘adopt all recommendations’, although it seems that this may be mere puffery given the fact that 2 weeks seems like a particularly short amount of time to have fully considered precisely what ‘adopting all recommendations’ will involve.
I offered some of my preliminary thoughts on the Final Report in my blog dated 4 February. Now that we have had more time to better understand the extent of the recommendations, the question that really strikes me is 'has the Final Report done enough?'
Commissioner Hayne identified several issues that continue to occur within the finance sector, which are problematic and require attention. We can’t though be surprised at any of these, nothing is new here:
poor risk management;
poor cultures within organisations, including commission-driven sales cultures;
inadequacies in dealing with customer complaints; and
regulatory failures.
To combat these issues, the Final Report’s recommendations seem to outline a series of principles that need to be adopted to address future behaviour. These include:
obey the law;
avoid misleading conduct;
act fairly;
provide services fit for purpose;
deliver services with reasonable care and skill; and
act in the best interests of clients.
I am not persuaded that that this is either helpful, or effective. What does it mean? The report does not contain actual measurable indicators. It lacks specificity, and it appears to leave a lot of work up to organisations such as banks, to act on. For example, to address the matter of changing culture and governance (recommendation 5.6), the report has left it to the institutions to consider its culture, assess it, identify problems and deal with those problems.
What is obvious is that the Final Report lacks in some important areas. It did not make recommendations to abolish the vertically-integrated banking model (where organisations manufacture, sell and advise on their own products). Of course, some organisations began dealing with this internally ahead of the release of the report (although where that may lead, and for how long, we cannot know).
The report did not deal with the underlying reasons why the regulators have failed for so long.
It did not deal with the substantial inadequacy of financial literacy for consumers, nor did it combat the asymmetry of power between banks and consumers.
It did not deal with the structure of the banking sector being fundamentally flawed, if the intention is to put the interests of consumers first. Australia’s banks are answerable to shareholders. The obligation on banks is to seek to maximize profits. This seems almost entirely inconsistent with providing advice that is in the best interests of the consumer (the bank’s customer). If consumers don’t fully understand their options (what alternatives are available, what alternative options involve etc), under the existing structure how can banks be expected to provide advice adverse to its own interests, and in the best interests for the consumer, which would have the potential to impact its bottom line. It is a real shame that the Final Report did not consider this.
It seems that investors and shareholders are not bothered by the Royal Commission findings in terms of culture and treatment of customers, noting that the share price in all banks went up the day after the Final Report was released, and the banking sector as a sector of the ASX finished on its highest price since 2016.
I wonder whether it is a telling sign that a Parliamentary Inquiry into the banking sector has now been launched by the Senate, further scrutinising the treatment of consumers by banks. The terms of reference for this Inquiry were passed on Tuesday this week, with the final report due by 8 April 2019.”
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