An aggressive, sales-driven culture with an emphasis firmly on profits – that was the striking perspective on the financial services industry that drove the initial Royal Commission report. When the hearings took place, some shocking practices emerged – from charging fees when no services were actually provided, through to collecting money from customers that had already passed away. Today, after months of speculation over everything from a regulator shake-up to the removal of commissions, we finally received the verdict as the Royal Commission’s final report was released at 4:20pm AEDT.
The final report has called for a total overhaul of the sales culture across financial services – particularly as it relates to conflicts of interest – with a total of 76 recommendations, including 15 for the insurance sector. The Commissioner, Kevin Hayne, also referred possible criminal breaches by insurers, banks and superannuation trustees to the regulator – although the specific names of the companies that may face charges was not included.
Shortly after the report was released, Treasurer Josh Frydenberg commented that “the banking sector must change and change forever.”
“There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and their boards and their senior management,” he said.
In particular, the report has hit mortgage brokers – the commission recommends a move from a commission-based model to a fee-based model with the Government saying it will ban trail commissions referring to new loans from July 2020. The report also recommends a ban on commissions for financial advisors so it is clear they act for the person and nobody else, as well as te removal of hidden fees.
One of the key changes for the insurance sector was the separation of the sale of add-on insurance. Their sale must now be separate from the sale of the original product.
“For example, today people are being sold a mobile phone and at the same time are being sold basic screen cover insurance which can cost more than the actual replacement of the screen itself,” Frydenberg noted.
In addition, the report recommended that the accountability regime known as Bear be extended to both insurance and superannuation. A new system of discipline for financial advisors will also be implemented “with stronger industry reference checking, greater reporting of serious compliance concerns, and a new single disciplinary body, with which all advisors must be registered,” the Treasurer outlined.
The so-called “grandfathering of conflicted remuneration for financial advisors,” will be ended effective from January 01, 2021, while Frydenberg also confirmed changes to compensation.
“For the first time, the government is establishing a compensation scheme of last resort,” he said. “We will expand the remit of the Australian financial complaints authority, known as Afca, so they can award compensation for successful claims going back a decade.
“And this is consistent with the period examined by the royal commission. Afca, which today can make binding determinations on industry, of up to $500,000 for individuals, $1 million for small businesses and $2 million for agribusinesses, will now administer this compensation scheme of last resort.
“Let me be clear - personal responsibility for financial decisions rests with those who make them. However, consumers and small businesses who suffer harm as a result of misconduct will now have access to redress.”
Speaking in response to the findings, ABC political editor Andrew Probyn remarked that there was “not a great deal of blood and guts” in the report with no specific referrals for executives – but there are 22 individual entities that will be referred to either ASIC or the ARPA for criminal offences. All of the major banks are listed, with the exception of Westpac.
The regulators, meanwhile, face pressure to do more when it comes to enforcement – the emphasis is on more prosecutions rather than settlements. However, the Treasurer recognised their efforts to make change – highlighting a new chair and two deputy chairs at ASIC and $170 million being committed in additional funding to assist them going forward. Capability reviews will be conducted every four years.
We’ll bring you more on the Royal Commission report – including the specifics of its impact on the insurance sector – in our morning briefing tomorrow.