The Final Report of the Hayne Royal Commission makes seventy six recommendations, all largely accepted by the Government and Opposition. Building on last September’s Interim Report, three major concerns underlie it: a hostility to conflicts of interest; regulatory failure; and dangers of staff incentives. They will shape the sector going forward.
The Report attacks the conflicts issue frontally, stating: “…conflicts cannot be ‘managed’ by saying, ‘Be good. Do the right thing’. People rapidly persuade themselves that what suits them is what is right. And people can and will do that even when doing so harms the person for whom they are acting”. It found the premise of the current law – to recognise and regulate conflicts – is “flawed”.
Instead the Final Report urges that “conflicts should be eliminated”. It recommends eliminating remuneration tainted by conflicts, such as that involving: mortgage broking, where lenders pay brokers; grandfathered conflicted commissions; and life, general, consumer credit and add-on insurance products.
It also recommends that: mortgage brokers owe borrowers a best interests duty; financial advisers disclose any lack of independence; and superannuation entities not act as fund managers and limit dealings with related parties for life insurance.
The Final Report demands cultural reform within ASIC. The Interim Report criticised ASIC, saying “there seems to be a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing”. The Final Report states “ASIC now accepts that, when considering enforcement measures, it should start with the question: ‘Why not litigate?’”. It endorses ASIC’s change of heart.
This will mean a more hostile approach of ASIC to compliance. As the Final Report stresses, “adequate deterrence of misconduct depends upon visible public denunciation and punishment”.
The Final Report attacks the way remuneration of financial services staff led to much of the misconduct. It states “poor remuneration and incentive programs have led to poor customer outcomes, driven by the pursuit of the entity’s revenue and profit, and the individual actor’s profit”.
This led to recommendations about staff remuneration. They include the notion that “eligibility to receive any personal incentive payments will be based on [the] contribution across a range of measures, of which sales will not be the dominant component”.
New Era for Financial Services
The Report proposes a range of sweeping changes to the landscape underlying the provision of financial services, particularly for disloyalty to customers, regulatory failings and inappropriate staff remuneration. All involved in it will benefit from carefully considering its implications. To better understand what the Final Report’s recommendations could mean for your business, please contact the Banking and Finance Team at Madison Marcus.
Pier Parisi – Special Counsel Christopher Aylward- Partner
Banking & Finance
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