How did we get here and where to from here?
The ongoing Royal Commission into the Banking, Superannuation and Financial Services Industry has uncovered some concerning truths about our banks. If you would like to know what the banks have admitted to, what punishments they’re likely to face and what we can expect moving forward, have a read of this article.
History of investigations
The financial industry has been the subject of many investigations over the past 20 or so years. In 1996, the Wallis Inquiry was set up to investigate Australia’s financial system. The Inquiry recommended 115 changes be made to the regulatory arrangements of the financial industry. The recommendations were deemed to be integral to improving the effectiveness of the industry. In 2003, there was a Royal Commission into the collapse of HIH Insurance, which yielded 26 recommendations. The recommendations included proposed amendments to legislation such as the Corporations Act 2001, the Insurance Act 1973 and the Income Tax Assessment Act 1936. Recommendation 26 was that:
‘APRA (should) develop a more skeptical, questioning and, where necessary, aggressive approach to its prudential supervision of general insurers.’
However, in the 2017/18 Banking Royal Commission, Commissioner Hayne said this about APRA and ASIC (both of these are regulating bodies):
‘When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of hat had been done.”
In 2014, the Murray Financial System Inquiry took place, and although it gave 44 recommendations, the Report claimed that ‘Australia’s financial system has done well since the Wallis Inquiry and has many strong characteristics’.
Between 2014 and 2017 there were numerous other investigations into banks such as the Commonwealth Bank of Australia (CBA), the National Bank of Australia (NAB), Westpac and Macquarie Bank.
Current legal framework that is in place includes things like the Banking Code of Practice, ASIC and APRA Regulations, the Corporates Act, ASIC Act to regulate the banking industry, and the National Consumer Credit Protection Act.
The Banking Code of Practice covers topics such as ethical behaviour, lending practices and financial protection. Although banks are deemed to be contractually bound by the Code, it is not legislation. One of the questions raised in the Royal Commission is whether the Code should be made into law.
The Royal Commission’s key objectives
The Royal Commission into the Banking, Superannuation and Financial Services Industry was established on 14 December 2017. The Royal Commission asked the questions:
- Have any of Australia’s financial services entities engaged in misconduct; and
- Should criminal or other legal proceedings be referred to the Commonwealth?
An Interim Report was published on 30 September 2018 and a Final Report will be published on 1 February 2019. At Lynn & Brown, we have written articles about the Royal Commission as it has been unfolding, so if you would like to know more about what has happened so far, please read our previous articles. We have an article about CBA charging dead people fees, NAB potentially being guilty of a crime and a summary of what the Royal Commission could mean for you.
Stories that have come out of the Royal Commission
Below are some of the findings of the Royal Commission:
- Has been charging dead people fees;
- One man’s estate was still being charged 10 years after he had passed away (in 2007);
- CBA contacted the abovementioned man’s wife in 2013 but CBA still continued to charge fees; and
- Five CBA employees admitted to knowingly charging dead people fees.
- NAB employees were paid cash bribes to write loans based on fake documents and overlook fraudulent or missing details in applications in an effort to hit targets and collect bonuses; and
- NAB owned superfund, MLC Super Fund, was charging dead people fees.
- Made 20 misleading statements to ASIC in 12 communications regarding fees for no service; and
- Admitted to 196 cases of charging fees for no service.
- Forced an 81-year-old farmer off his property despite never being late for a mortgage repayment, after devaluing his home following the drought;
- Admitted to 10 cases of conduct falling below community standards and breaching the Banking Code of Practice; and
- Breached financial advice laws by mis-selling a superannuation product over the counter.
Commissioner Hayne’s 99 questions
Commissioner Hayne, a former Justice of the High Court, asked 99 questions in the Interim Report. The questions raised can be separated into three categories: issues, causes and responses.
- Access to banking services:
- Do all Australians have adequate access to banking services?
- What duty do intermediaries owe to consumers?
- What duty should they owe to consumers?
- Responsible lending:
- How should lenders assess suitability?
- How should lenders manage the exit from a loan in cases of borrower default and the end of a loan’s term?
- Regulation and regulators:
- Have entities responded sufficiently to the conduct identified and criticised in this Report?
The Interim Report asks the question: What are the causes of the conduct identified and criticised in this Report? Four possible causes are identified, being conflicts of interest, remuneration structures, culture and governance and regulatory responses.
In the Interim Report, Commissioner Hayne posed questions about what should be done in light of the findings of the Royal Commission. Proposed responses include:
- Should there be changes in the law?
- Should the regulatory architecture change?
- Should the Banking Code of Conduct be made into law?
- Should there be structural changes in the industry?
What are the consequences for the banks?
It’s understandable that you may be wondering what consequences the banks are likely to face. At this stage it appears that criminal prosecution is unlikely, however this does not mean the banks will not be punished for their misconduct.
It’s estimated that the banks will need to pay approximately $7.4 billion as a consequence of the misconduct that the Royal Commission has uncovered. The estimated total refunds each bank will have to pay customers who were charged for no or poor advice is as follows:
- AMP: $734 million
- ANZ: $286 million
- CBA: $370 million
- NAB: $461 million
- WBC: $387 million
Not only do the banks need to refund their customers, but they will also need to dish out big bucks to implement programs that work out the required refunds. These programs are estimated to cost about $1.8 billion. On top of that, the total estimated cost of litigation and other fees associated with the Royal Commission are about $1,437 million. This ABC news article provides graphs and tables detailing the ‘cost of bad behaviour’ for the banks.
Where to from here?
Now that you have a summary of what was found during the Royal Commission and what consequences the banks will face, you probably want to know what is going to be done about it. After all, we all use banks, and therefore it’s important for all of us to have some reassurance that things are going to change.
Here is a list of some of the possible changes moving forward:
- The Commission is not proposing any additional regulation for SME (Small and Medium Enterprises) lending, however, questions and issues around this have been raised;
- The lending process is going to take longer due to mechanisms that will be put in place such as more paperwork, deeper analysis and greater lead times to funding;
- The banks will need to take a more conservative risk appetite, meaning marginal credits will no longer be approved;
- There will be tighter lending criteria and therefore a reduced capacity to borrow;
- There may be civil and criminal litigation;
- The Big 4 will no longer engage in SMSF (Self-managed Super Fund) lending;
- The Big 4 will no longer give reverse mortgages;
- It will be harder to get finance;
- Deeper reviews of spending habits will take place; and
- Interest rates are set to increase.
To sum all of that information up, the 2017/19 Banking Royal Commission is not the first of its kind – the finance industry has been subject to numerous investigations over the past 20 years. The 2017/19 Royal Commission was aimed at finding out whether the banks had engaged in misconduct and whether any civil or criminal proceedings should be referred to the Commonwealth. The Interim Report published on 30 September 2018 tells us that criminal action is unlikely, but the banks will be hit with bills of approximately $7.4 billion as a consequence of their misconduct. The Interim Report also provided 99 questions that Commissioner Hayne is seeking answers to, which are about the issues found, the causes of those issues and potential responses. It is clear that there will be stricter regulations and harsher consequences for misconduct as a result of this Royal Commission, however exactly what those regulations will be is still uncertain. We will find out more on 1 February 2019 when the final findings are handed down.
About the authors:
This article has been co-authored by Chelsea McNeill and Steven Brown at Lynn & Brown Lawyers. Chelsea is in her third year of studying Law at Murdoch University. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.