The Financial Markets Authority (FMA) will be emboldened by the Australian Royal Commission's final report in its quest to rid New Zealand's financial services sector of sales incentives. And ex-BNZ CEO Andrew Thorburn, now CEO of BNZ's parent National Australia Bank, has been mauled by Commissioner Kenneth Hayne.
These are two obvious points of interest from a New Zealand perspective from Hayne's final report, released Monday evening. Another one is a focus on distressed agricultural loans, and the recommendation a national scheme of farm debt mediation should be enacted. A Farm Debt Mediation Bill is currently before NZ's Parliament.
In a statement Finance Minister Grant Robertson and Commerce & Consumer Affairs Minister Kris Faafoi said; "We will look closely at the recommendations of the Royal Commission to see whether they should be implemented here."
In what will be music to FMA CEO Rob Everett's ears Hayne said; "Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards."
"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."
Australian Treasurer Josh Frydenberg says his Government will take action on all 76 recommendations in the final report. The Sydney Morning Herald reported Frydenberg saying there had been 24 referrals for potentially criminal conduct including three of the major banks from superannuation and insurance activity.
The SMH said two banks, likely to be National Australia Bank (NAB) and ASB's parent Commonwealth Bank of Australia (CBA), could be referred to the Commonwealth Department of Public Prosecutions for criminal charges over fees for no service. AMP has already been referred. Frydenberg also reportedly said while only corporations were named in the report, that didn't prevent individual executives from also being prosecuted.
The report notes that between them, AMP, ANZ, CBA, NAB and Westpac will pay customers of their advice licensees or their superannuation funds compensation totalling A$850 million, or more, for taking money as payment for services that were not provided.
However, the SMH also reported that the report stopped short of recommending any major changes to responsible lending requirements, which should alleviate concerns about a credit crunch that could hit the already soft housing market or impact the economy.
Thorburn & NAB in the firing line
Hayne had some choice words for NAB and Thorburn, who was well respected during his time at BNZ's helm between 2008 and 2014.
"NAB also stands apart from the other three major banks. Having heard from both the CEO, Mr Thorburn, and the Chair, Dr Henry, I am not as confident as I would wish to be that the lessons of the past have been learned," said Hayne.
"More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly."
"I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the board had dealt with some issues. I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and NULIS on this account is likely to be more than $100 million," Hayne added.
"I thought it telling that in the very week that NAB’s CEO and Chair were to give evidence before the Commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas. Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains."
Mortgage brokers not happy
The three volume final report from Hayne's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is 1,133 pages in full. Frydenberg's response is 42 pages long. The three reports are available in full here.
Despite all the tough talk, The Australian Financial Review is suggesting the four pillars of Australia's banking system - CBA, Westpac, NAB and ANZ - will be unshaken by Hayne's final report with their core businesses poised to emerge unscathed.
Mortgage brokers are, however, facing major changes as previewed by interest.co.nz in December. And they're not happy. The Finance Brokers Association argues eliminating trail commissions for brokers could push up the price of loans for borrowers.
Hayne is recommending that; "The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers."
Below is a summary from the final Royal Commission report.
1 This report
The central task of the Commission has been to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations. The conduct identified and described in the Commission’s Interim Report and the further conduct identified and described in this Report includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. 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.
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:
• 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.
Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards. Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law. Rewards have been paid regardless of whether the person rewarded should have done what they did.
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.
The interests of client, intermediary and provider of a product or service are not only different, they are opposed. An intermediary who seeks to ‘stand in more than one canoe’ cannot. Duty (to client) and (self) interest pull in opposite directions.
Chapter 7 of the Corporations Act 2001 (Cth) (the Corporations Act), and the National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) (but not the Superannuation Industry (Supervision) Act 1993 (Cth) – the SIS Act), speak of ‘managing’ conflicts of interest.2 But experience shows that conflicts between duty and interest can seldom be managed; self‑interest will almost always trump duty. The evidence given to the Commission showed how those who were acting for a client too often resolved conflicts between duty to the client, and the interests of the entity, adviser or intermediary, in favour of the interests of the entity, adviser or intermediary and against the interests of the client. Those persons and entities obliged to pursue the best interests of clients or members too often sought to strike some compromise between the interests of clients or members and their own interests or the interests of a related third party (such as the person’s employer, or the entity’s owner). A ‘good enough’ outcome was pursued instead of the best interests of the relevant clients or members. (Notions of best interests and conflicts between duty and interest are further examined below in connection with mortgage brokers, financial advice and superannuation.)
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.
Some may see what has emerged from the work of the Commission only through the lens of public accountability for what has happened. And public accountability is critically important. But it cannot be the only focus. It is necessary to look to the future as well as to the past.
The responses and recommendations made in this Report will attract varied responses. Those who oppose change will appeal to real or supposed difficulty in altering present arrangements. Reference will be made to change bringing ‘unintended consequences’. That argument is easily made because it has no content; the ‘consequences’ feared are not identified.
But choices must now be made. The arrangements of the past have allowed conduct of the kinds and extent described here and in the Interim Report of the Commission. The damage done by that conduct to individuals and to the overall health and reputation of the financial services industry has been large. Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened. The financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again.
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.
Below are some of Hayne's 76 recommendations.
Recommendation 1.2 – Best interests duty.
The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision.
Recommendation 1.3 – Mortgage broker remuneration.
The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.
Recommendation 1.5 – Mortgage brokers as financial advisers.
After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
Recommendation 1.8 – Amending the Banking Code.
The ABA should amend the Banking Code to provide that:
• banks will work with customers: – who live in remote areas; or – who are not adept in using English, to identify a suitable way for those customers to access and undertake their banking;
• if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow AUSTRAC’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage;
• without prior express agreement with the customer, banks will not allow informal overdrafts on basic accounts; and
• banks will not charge dishonour fees on basic accounts.
Recommendation 1.11 – Farm debt mediation.
A national scheme of farm debt mediation should be enacted.
Recommendation 1.12 – Valuations of land.
APRA should amend Prudential Standard APS 220 to:
• require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and
• provide for valuation of agricultural land in a manner that will recognise, to the extent possible: – the likelihood of external events affecting its realisable value; and – the time that may be taken to realise the land at a reasonable price affecting its realisable value.
Recommendation 1.13 – Charging default interest.
The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.
Recommendation 1.14 – Distressed agricultural loans.
When dealing with distressed agricultural loans, banks should:
• ensure that those loans are managed by experienced agricultural bankers;
• offer farm debt mediation as soon as a loan is classified as distressed;
• manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst;
• recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and
• cease charging default interest when there is no realistic prospect of recovering the amount charged.
Recommendation 3.4 – No hawking.
Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product.
Recommendation 5.4 – Remuneration of front line staff.
All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it.
Recommendation 5.5 – The Sedgwick Review.
Banks should implement fully the recommendations of the Sedgwick Review.
Recommendation 6.2 – ASIC’s approach to enforcement ASIC should adopt an approach to enforcement that:
• takes, as its starting point, the question of whether a court should determine the consequences of a contravention;
• recognises that infringement notices should principally be used in respect of administrative failings by entities, will rarely be appropriate for provisions that require an evaluative judgment and, beyond purely administrative failings, will rarely be an appropriate enforcement tool where the infringing party is a large corporation;
• recognises the relevance and importance of general and specific deterrence in deciding whether to accept an enforceable undertaking, and the utility in obtaining admissions in enforceable undertakings; and
• separates, as much as possible, enforcement staff from nonenforcement related contact with regulated entities.
And here's Robertson & Faafoi's full statement.
Australian Royal Commission findings concerning, but NZ moves to protect consumers already in train
The New Zealand Government will closely analyse the outcomes of the Australian Royal Commission but has already committed to ensure consumer interests are protected in the banking and insurance sector.
Minister of Finance Hon Grant Robertson said that a financial sector putting profits ahead of customers was unacceptable, but banks and the wider financial sector were already “on notice” in New Zealand.
“The New Zealand Government had already received reports on conduct and culture in our banking and insurance industry from the Financial Markets Authority (FMA) and Reserve Bank of New Zealand.
“The reviews have identified a number of issues with bank and insurer conduct, and also gaps in how we regulate them. Some of the issues are similar to those highlighted by the Australian Royal Commission, but not as widespread.
“We will look closely at the recommendations of the Royal Commission to see whether they should be implemented here.”
Minister of Commerce and Consumer Affairs Hon Kris Faafoi said banks had broadly accepted the findings of the New Zealand conduct and culture review, and he expects that the March report back from banks would show significant measures to ensure customers were back at the heart of decision-making.
“We have been clear that we expect to see things change and a balancing of the need for profit with banks delivering on the privilege of operating here.
“Further, in light of the FMA-RBNZ report on insurer conduct, last week we agreed that we would fast-track customer protection measures across the financial sector.
“New Zealand will have a regime where banks and insurers are entirely focused on good outcomes for the consumer.”
Kris Faafoi said there was a raft of work already underway:
“The Financial Services Legislation Amendment Bill, already at the committee of the whole house stage and close to a final reading, will provide a clear duty for anyone giving advice to ensure a good customer outcome is the priority.
“We also have the Credit Contracts and Consumer Finance Act reform in progress, which will address irresponsible lending and debt collection practices.
“Officials are already working on the fast-tracked broad suite of measures needed to remove regulatory gaps across the finance sector. We will consult on these in May, and this will run alongside work we already have underway to update insurance contract law.
“Consumers are at the top of my mind because unless we share New Zealand’s prosperity more fairly, our economy is not going to deliver for New Zealanders.”