When a Liberal Treasurer and former banker meets with a royal commissioner whose banking and finance inquiry he (along with the rest of the Turnbull-Morrison Government) tried to nobble.................
It’s known, in the game,
as a picture opportunity.
Politician on the make
meets constituent/kiddie/moviestar/public figure, hands are grasped, big
smiles, cameras whir, flashes pop and the happy little circus moves on.
Sometimes, it doesn’t
work so well. The kiddie bursts into tears. Sometimes, it’s a bust. The movie
star’s smile is so radiant the politician may as well have stayed in bed.
And then there’s the day
the Treasurer, Josh Frydenberg, met the royal commissioner, Kenneth Hayne.
The very air took on a
chill so deep it might have blown in from the Arctic vortex currently turning
the northern hemisphere to ice.
"A handshake or
something...?" implored a photographer, vainly hoping to open a crack in
the glacial atmosphere.
Commissioner Hayne,
fresh from months assailed by evidence of the wicked doings of gangsters in
suits and giving more than a few of them a doing-over from the bench, wasn’t in
a handshaking sort of mood. Or any sort of ice-breaking mood at all.
As Frydenberg, the
Treasurer of Australia, sought desperately to maintain a smile that gradually
devolved into a hideous rictus, Justice Hayne studied a spot in the air that
might have been in a universe far, far away, where he appeared to wish he might
be transported.
His hands remained
determinedly resting, jiggling slightly, on the Treasurer’s desk. Not a word
passed his lips, nor the hint of a smile.
The occasion was the
official hand-over of Justice Hayne’s voluminous findings on the behaviour of
Australia’s financial sector.
Frydenberg had needed
the photo opportunity to go well.
Why, the government he
serves had twisted itself in knots trying to avoid calling a royal commission
into the banks before being dragged screaming to it. Here was the moment to put
that all behind him.
Justice Hayne wasn’t
cooperating.
The awkward moment
stretched. And stretched. The volumes of the final Hayne report sat as
untouched. They might have been hand grenades…..
What the Royal Commissioner found.......
This Final Report seeks
to take what has been learned in respect of each part of the financial services
industry that has been examined and identify:
•
issues;
•
causes; and
•
responses and recommendations.
1.1 Four observations
Those
analyses, taken together, will reveal the importance of four observations about
what has been shown by the Commission’s work: the connection between conduct
and reward; the asymmetry of power and information between financial services
entities and their customers; the effect of conflicts between duty and
interest; and holding entities to account.
Each
of those observations should be explained.
First,
in almost every case, the conduct in issue was driven not only by the relevant
entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in
the form of remuneration for the individual or profit for the individual’s
business. Providing a service to customers was relegated to second place. Sales
became all important. Those who dealt with customers became sellers. And the
confusion of roles extended well beyond front line service staff. Advisers
became sellers and sellers became advisers.
The
conduct identified and condemned in this Final Report and in the Interim Report
can and should be examined by reference to how the person doing the relevant
acts, or failing to do what should have been done, was rewarded for the conduct…..
Second, entities and
individuals acted in the ways they did because they could. Entities set the
terms on which they would deal, consumers often had little detailed knowledge
or understanding of the transaction and consumers had next to no power to
negotiate the terms. At most, a consumer could choose from an array of products
offered by an entity, or by that entity and others, and the consumer was often
not able to make a well-informed choice between them. There was a marked
imbalance of power and knowledge between those providing the product or service
and those acquiring it.
Third, consumers often
dealt with a financial services entity through an intermediary. The client
might assume that the person standing between the client and the entity that
would provide a financial service or product acted for the client and in the
client’s interests. But, in many cases, the intermediary is paid by, and may
act in the interests of, the provider of the service or product. Or, if the
intermediary does not act for the provider, the intermediary may act only in
the interests of the intermediary…..
Fourth,
too often, financial services entities that broke the law were not properly
held to account. Misconduct will be deterred only if entities believe that
misconduct will be detected, denounced and justly punished. Misconduct,
especially misconduct that yields profit, is not deterred by requiring those
who are found to have done wrong to do no more than pay compensation. And wrongdoing
is not denounced by issuing a media release.
The
Australian community expects, and is entitled to expect, that if an entity
breaks the law and causes damage to customers, it will compensate those
affected customers. But the community also expects that financial services
entities that break the law will be held to account. The community recognises,
and the community expects its regulators to recognise, that these are two
different steps: having a wrongdoer compensate those harmed is one thing; holding
wrongdoers to account is another…..
1.2 Primary
responsibility
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. Nothing that is
said in this Report should be understood as diminishing that responsibility.
Everything that is said in this Report is to be understood in the light of that
one undeniable fact: it is those who engaged in misconduct who are responsible
for what they did and for the consequences that followed. Because it is the
entities, their boards and senior executives who bear primary responsibility
for what has happened, close attention must be given to their culture, their
governance and their remuneration practices.
The Final Report contains 76
recommendations and the Morrison Government states that it will “take
action” them all. However the number of parliamentay sitting days Prime Minister Morrison has scheduled for 2019, commencing on 12 February 2019 and thereafter for thirteen days until 30 May, rather rules out the Parliament addressing the issue for much of this year.
Volume 2 of the Final Report holds findings
on the Case Studies. These studies involve the National Australia
Bank (NAB) and its affiliates, the CBA Group, the AMP Group, IOOF, a subsidiary
& associated entities, ANZ Bank, Suncorp, Q Super and Hostplus Superannuation
Fund.
The Royal Commissioner
made
24 referrals to the regulators ASIC and APRA to take action over misconduct
and all but one of the major banks were named in referrals.
On
4 February 2019 when Frydenberg asked by mainstream media why the Coalition
Government had not addressed some of these issues sooner he tried to defect blame to Labor not once but twice for not acting when it was last in office.
Unfortunately
for the Treasurer this opinion had already appeared in The Sydney Morning Herald on 28
April 2018 reminding voters of the truth:
The Coalition wasn't
merely asleep at the wheel when it came to the practices being exposed at the
banking royal commission: it pulled out all stops to allow some of them to
continue, including attempting to circumvent the will of parliament, in an
extraordinary 12-month burst of activity that began within weeks of its
election.
It had inherited Labor’s
Future of Financial Advice Act, legislated in 2012 but not due to take full
effect until mid 2014, 10 months after the election that swept it to power.
The result of a
parliamentary inquiry and years of agonising about how to protect consumers in
the wake of the collapse of investment schemes including those run by Storm
Financial, Timbercorp, Opes Prime, Bridgecorp, Westpoint, Trio and Commonwealth
Financial Planning Limited, the law banned secret commissions and, from that
point on, required financial advisers to put the interests of their clients
ahead of their own.
Actually, it came into
effect on July 1, 2013 during the life of the Gillard Labor government, but the
Securities and Investments Commission decided to take “a
facilitative compliance approach”, meaning it wouldn’t enforce it until
July 1, 2014, which turned out to be after the Coalition took office.
The law banned kickbacks
and commissions paid to advisers by the makers of the products they were
selling, which for the dangerous products had been extraordinarily large. Advisers
putting retirees into Storm Financial had been paid 6 to 7 per cent of the
amount invested. Advisers putting clients into Timbercorp had been paid 10 per
cent plus an ongoing fee for as long as the funds stayed there.
Labor’s law wound back,
but did not completely eliminate, the ability of banks to reward their staff
for recommending the banks’ own products, and it only applied prospectively.
Existing kickbacks could remain but clients would have to be told how much
money was being taken out of their investments each year and would have to
approve.
Once every year they
would be given a statement explicitly telling them how much of their funds was
being siphoned off to pay their adviser. Once every two years they would be
asked if they wanted it to continue. If they said "no" or said
nothing (which would be the case if they were dead, or the adviser had lost
contact with them) the outflow would stop.
Clients who felt they
were continuing to get good service from their adviser could allow the
withdrawals to continue, which might be why it so terrified the (largely
bank-owned) advice industry.
Days before Christmas
2013 the Coalition outlined amendments it hoped to get through parliament. Fee
disclosure statements were only to be provided to new clients. Old ones could
remain in the dark. And there would be no need for clients to opt in to having
money removed from their accounts, ever. And there would no longer be an
overarching requirement for advisers to act in the best interests of their
clients, merely steps they would have to follow, “so that
advisers can be certain they have satisfied their obligations”.
As July 1 2014
approached and it looked as if the amendments wouldn’t get through parliament,
Finance Minister Mathias Cormann gazetted regulations that purported to have
the same effect. Parliament would have been able to disallow them when it next
met, but he delayed tabling them until the last possible moment, lengthening the
period of time they were in force without being tested. Then Labor trumped him
by reading them out aloud in the Senate, which effectively tabled them and
forced a vote. Cormann managed to get the Palmer United Party on side and keep
the regulations at first, until Jackie Lambie split with Clive Palmer over the
issue and left his party and voted them down.
Then, when all had been
lost, the banks and financial advisers begged for more time. They have been
"thrown into disarray" and wouldn’t have their systems ready. ASIC
said it wouldn’t enforce the law until July 1, 2015, two years after it had
been due to begin.
ASIC and Cormann had
given the financial advice industry an extra two years in which to charge
commissions and escape an overarching requirement to put the clients first.
Even now, all this time
later, I can’t work out why Cormann tried so hard.
