The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) was released on 4 February. The report contains 76 recommendations which extend to areas across Australia's financial system.
Since the Global Financial Crisis (GFC) Australia has seen more than 20 inquiries and reviews into various aspects of the financial system. Little has changed. For the first time, the Royal Commission has focused on the culture of the financial services industry and has identified regulatory, compliance and conduct risk as requiring necessary and urgent change.
To effect cultural change within the financial services industry, and particularly within banks, is easier said than done. Commissioner Hayne has made some recommendations that have the potential to start from “the inside out” rather than the top down, which means that there may be a real chance at change, at least on some level. For example, the Final Report has set out recommendations to (a) abolish trail commissions paid to mortgage brokers; (b) introduce a ‘fee for service’ fee structure for mortgage brokers (where the fees are paid by the borrower rather than the lender); and (c) subject mortgage brokers to the same regulation as entities providing financial service products to retail clients. On one level, this is a good start.
The lack of accountability within the financial services industry is a fundamental issue that needs to be addressed - accountability of the regulators, of the corporations and of the individuals managing and controlling the corporations. Commissioner Hayne in the final report has said: “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.”
The Final Report has made recommendations which go to strengthening and broadening the powers of the regulators (APRA and ASIC), and has recommended regulating the regulators, by way of the establishment of a new ‘oversight authority’ for APRA and ASIC. These recommendations relate to the new oversight authority being independent of government, staffed by three part-time members and one permanent secretariat, reporting to the Minister at least every 2 years.
There can be no doubt that for too long the regulators have failed, and accountability is an issue. However, regulating the regulator is not necessarily the answer. Until attention is given to understanding why the regulators have failed, why current powers are not utilised, and the extent to which funding constraints play a role in inadequate regulation, there is reason to be sceptical as to whether further powers will overcome regulatory failure, and whether regulating the regulator will help deliver regulatory objectives, or whether it will be another layer of complicated administrative procedures.
The Final Report has made some recommendations relating to the BEAR (the ‘Banking Executive Accountability Regime’ designed to increase accountability in the banking sector by amending the Banking Act 1959). The BEAR is a government initiative introduced in May 2017. The BEAR has significant limitations and problems, and unfortunately the recommendations seem to be limited to the implementation of the BEAR, by recommending joint implementation by APRA and ASIC (presently the implementation is by APRA alone), rather than dealing with the core issues of its application and intent.
Ultimately, whether the Royal Commission proves to be as pivotal as it could be will depend on what the Government and industry do after the dust has settled. Emotive headlines and apologies are one thing, however if the royal commission is treated as another ‘show trial’ rather than given the respect and attention it deserves, then it will be an unfortunate wasted exercise.