After 11 months of public hearings, the royal commission’s interim report highlighted problems relating to financial advice, including sales culture, the effectiveness of the Future of Financial Advice (FOFA) reforms, and grandfathered commissions. The themes identified in the report were:
- Culture and incentives. Issues on how industry participants were paid and motivated by a “sales above all” culture, e.g. calculation of bonuses and other incentives
- Structural issues surrounding financial advice. Consideration of consequences stemming from or appearing to stem from vertical integration (where an entity manufactures and sells financial products while also advising clients which of their products to buy/use) of some financial services entities.
- Conflicts of interest and duty. Issues about the confusion of roles and responsibilities, e.g. mortgage brokers and aggregators and about FOFA’s treatment of conflicts of interest that can and should be managed
- Effectiveness of Regulators. Consideration of what responses regulators such as Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) can and should be making in relation to the highlighted types of conduct.
These findings could trigger a chain of events:
Entities that employ vertical integration in their organizational structure may be required to sell off their vertically integrated divisions. As a result, the share prices of the affected banks could be suppressed and may lead to the banks themselves becoming target acquisitions.
The selling of vertically integrated divisions will also lead to increased merger and acquisition activity in the Australian banking and financial services sector and would lead to an opportunity to acquire high quality financial services which would normally not be available.
Lastly, employees affected by the reorganization of their companies will provide greenfield projects with high quality human resources.
Regulatory and Legislative changes
As a response to the themes identified by the royal commission, regulatory and legislative changes have already commenced. These are:
- an increase in power and resources for ASIC
- significant levels of new legislation and compliance requirements
- an improved customer complaint resolution system
- increases in education requirements of advisers
- new legislation proposed to increase accountability for executives
The changes, however, do not end there. More are likely to occur within the Australian regulatory and legal framework and would include:
- further reform to the corporations and superannuation legislation
- increased powers and enforcement for ASIC and APRA in addition to heightened scrutiny of their responses
- an increase in criminal and civil penalties for entities that have been involved in misconduct and shortfalls
Banks have implemented significant measures to change their structure and internal policies in response to the royal commission findings, e.g. reviewing codes of conduct, changing remuneration structures, increasing the focus on customer’s needs within their service models and selling off their wealth divisions. This will likely be a long-term initiative with legislative and regulatory repercussions that will make investigative and auditing measures mandatory and result in overall increases in regulatory, legal, and compliance costs in the sector.
About the Royal Commission
In the Australian system of government, royal commissions are the highest form of inquiry into a defined issue and are a matter of public importance. Commissions have considerable powers which can be greater than those of a judge however, restricted to the terms of reference of the commission.
On 14 December 2017, the Governor-General of the Commonwealth of Australia gave in to years of public pressure and established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which is currently underway. Its task is to look into any misconduct that Australia’s financial services entities might have engaged in, to consider if criminal or other legal proceedings should be referred to the commonwealth, and if there are satisfactory structures in place to compensate victims.
The inquiry has so far uncovered multiple counts of misconduct that include bribery, falsified documents, charging for services not rendered, and failure to properly examine the expenses of people they loaned money to. Last September, the royal commission released an interim report which this post’s insights and outlook is based on. The final report is expected to be out by February 2019.