Finance industry vows to do more

The Treasurer highlighted the work the Liberal-National government had been doing to “take strong action to reform the financial sector”, such as establishing the new Australian Financial Complaints Authority (AFCA), creating the Banking Executive Accountability Regime and setting aside an additional $70 million for the Australian Securities and Investments Commission (among other moves), but he said that there was “clearly more work to be done”.

He said: “Banks and other financial institutions have put profits before people. I’ll repeat that: Banks and other financial institutions have put profits before people.

“Greed has been the motive, as short-term profits have been pursued at the expense of basic standards of honesty. Too often simply selling products and services have become the sole focus of attention. The culture and the conduct of the banks was, in the words of the commissioner, ‘driven by and reflected in their remuneration practices and policies. This was coupled with deficiencies in governance and risk management’.”

He continued: “As a result, almost every piece of conduct identified and criticised in this report can be connected directly to some monetary benefit from engaging in the conduct.

“In the end, rules, systems, processes and practices are necessary, but having the right culture and performance depends, in the commissioner’s words, ‘upon people applying the right standards and doing their job properly’.”

The Treasurer went on to lambast the regulators, stating (and quoting Commissioner Hayne) that while behaviour was poor, when misconduct was revealed, it “either went unpunished or the consequences did not meet the seriousness of what has been done”.

Mr Frydenberg echoed Commissioner Hayne’s comments by concluding: “Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequence of the breach remedied. This is clearly unacceptable and cannot continue.”

ASIC chair James Shipton noted the report’s “serious and important observations of ASIC’s role as a regulator”, adding: “ASIC will carefully consider these observations, as well as the broader findings in the report, and will respond fully in its submission by 26 October 2018. 

“ASIC will continue to assist the royal commission and to work with the government, the Parliament and other regulators to build a stronger legislative, enforcement and regulatory framework with tougher penalties.”

Broking industry response

The head of the Finance Brokers Association of Australia (FBAA), Peter White, said that while the association was “still examining the documents in detail” and will be “making an extensive submission on this”, it thought that, “on first glance, it appears the commission does not fully understand the finance broking sector”.

Mr White commented: “We have had extensive dealings with Treasury, ASIC and the Productivity Commission about these issues and this report appears to be simply repeating the same things.

“This is not a game-changer for brokers. This interim report has recommendations only and many of those seem to have no material impact on how we do business.

“We expected an interim report like this and we will work through the points, but nowhere is there any suggestion that the broking sector is systemically broken.”

The CEO of the Mortgage & Finance Association of Australia (MFAA), Mike Felton, also said that it would be responding fully in due course, but welcomed that there was not a competition remit in the terms of reference.

Mr Felton continued: “However, ignoring competition when considering further changes to the financial system could lead to unintended consequences, and risks driving customers back to bank branches.”

Highlighting that mortgage brokers “bring competition to the mortgage industry”, Mr Felton went on to highlight the work of the Combined Industry Forum.

“The MFAA agrees with the report’s view that a higher customer duty is required to augment the existing legislation. That is why the industry is well progressed in expanding the definition of a ‘good consumer outcome’ to incorporate a ‘customer-first duty’,” the MFAA CEO said.

Looking at the issue of “conflicted remuneration”, Mr Felton said that “the MFAA does not believe there is value in entirely removing the correlation to the economic value which brokers produce in the loans they originate for lenders”.

He added: “Indeed, as noted by the Productivity Commission’s Inquiry Report, Competition in the Australian Financial System, ‘fixed fees paid by customers rather than commission structures have been proposed, and would eliminate conflicts, but the cost to competition would be high. Consumers would desert brokers, and smaller lenders (and regional communities with few or no bank branches) would suffer much more than larger lenders’.”

As such, Mr Felton said: “The MFAA, with the Combined Industry Forum, is committed to taking action to further improve customer outcomes and standards of conduct and culture, while preserving and promoting a vibrant and competitive mortgage broking industry that encourages consumer choice.”

Banking response

Several banking heads have also reacted to the interim report, with the CEO of the Australian Banking Association CEO, Anna Bligh, stating that the report “marks a day of shame for Australia’s banks”.

Ms Bligh said: “There are no excuses for the behaviour that has been exposed by the royal commission.

“Banks accept responsibility for their failures and right now they are working day and night to make things right for their customers.”

Looking to the future, Ms Bligh said: “We will fix these problems and make them right without delay, to earn back the trust of the Australian public.

“We will build a banking industry which acts with integrity and is once again respected by our customers and the Australian community.  

“The industry will respond to the specific findings in the interim report through a submission in the coming weeks.”

Meanwhile, the CEO of the Financial Services Council, Sally Loane, acknowledged that “the conduct of financial services providers over many years has been unacceptable”.

She said: “For consumers, interacting with banking and financial services is not voluntary. In a compulsory system, everyone has a right to be treated with fairness, honesty and utmost professionalism. The industry takes responsibility for the culture that led to some deplorable outcomes for many consumers and a transformation is long overdue.” 

The FSC supports Treasurer Josh Frydenberg’s comments that consumers must be put “first, second and third”.

[Related: Royal commission releases interim report]