Tuesday, 22 January 2019
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How to fix the banking system in the aftermath of the royal commission

What happens when the blowtorch is switched off? The FRLC’s call for a regular sector wide-review is one smart idea.

As submissions pour into the royal commission looking at ways to fix a broken system after decades of unfettered greed drove poor – and sometimes illegal – behaviour, those at the coal face of the human cost are calling for real solutions not just tweaks.

The hope is when the final report is released by Commissioner Kenneth Hayne the recommendations won’t become a political football in an election battle.

The royal commission has had a profound impact on some organisations. ASIC has become tougher, some organisations have banned grandfathered commissions, divisions have been shutdown, dodgy products cancelled and compensation is on offer. Executive remuneration packages have been trimmed and there has been a shakeup in some senior ranks including at AMP and NAB.

But the fear is what happens when the blowtorch is switched off? Will the banks revert to arrogance and greed? Will the regulators slip back into their old ways of being timid and too trusting? Will peak bodies dilute and delay the introduction of recommendations – as they always do?

The hope is Commissioner Kenneth Hayne's final report won't become a political football in an election battle. The hope is Commissioner Kenneth Hayne’s final report won’t become a political football in an election battle. David Rowe

Two of the more interesting submissions, come from Consumer group, Financial Rights Legal Centre (FRLC) and the Greens.

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The FRLC has seen a lot of misery caused by financial sector misconduct, including customers being ripped off by shoddy financial advice, legitimate insurance claims knocked back and irresponsible lending resulting in massive debts.

It calls for a regular sector wide-review or re-run of the royal commission. It is a smart idea that should be embraced.

The FRLC’s overarching theme is the law needs simplifying, consolidating, updating and strengthening. “Loopholes must be identified and closed and penalties need to increase to more effectively deter poor corporate behaviour.” Intervention is required to address cultural problems and consumers need to be better compensated. It is spot on.

It offers a blueprint of nine actions to fix the system.

Director duties

They include tackling cultural problems by introducing corporate social responsibility to directors, extending the Banking and Executive Accountability Regime (BEAR), ending all forms of conflicted remuneration and professionalising the industry by strengthening licensing, conduct, qualifications and ethics training.

Importantly, the FRLC wants BEAR broadened and linked to poor consumer outcomes and insurance companies, instead of the current regime which only applies to systemic and prudential matters. “BEAR in its current form is unlikely to compel any executive to face consequences for the string of scandals that the royal commission and other inquiries have identified,” the submission says.

Broadening directors’ duties by requiring explicit and mandatory consideration by directors of interests other than shareholders would also make a difference.

The brutal reality is unless changes like this are made, little will change. If directors believe their main responsibility is to shareholders then an emphasis on profit at any cost will quickly return.

FRLC’s second recommendation tackles the law. It wants the law to change to require financial institutions to require a rewording of loans to be “suitable” as opposed to “not unsuitable,” which would reduce the amount of unsuitable loans flogged to vulnerable customers.

It also wants junk insurance products banned including consumer credit insurance (CCI), add-on insurance, funeral insurance, accidental death and accidental injury products. And it wants the anti-hawking regime strengthened.

It also calls for loopholes to be closed including bringing debt management firms into the financial services regulatory framework, buy-now-pay-later providers put under the credit law umbrella and small business lending included in the regulatory framework by requiring licensing.

It wants external dispute resolution (EDR) and code of practice coverage for non-bank lenders and a tougher corporate regulator by better resourcing ASIC, giving it rule making powers and making penalties bite. It wants codes of conduct to be made mandatory, strengthened, monitored, enforceable and able to attract effective sanctions through co-regulation.

For the insurance sector, which has been involved in some grubby, egregious behaviour, it wants the prohibition on unfair contract terms to be extended to general, life and group insurance and legislation introduced to force the industry to adopt standard definitions, standardised product disclosure statements and mandatory codes of conduct applicable to all insurers and super trustees.

The CommInsure scandal in March 2016 highlighted the issue of medical definitions such as heart attacks and rheumatoid arthritis, where CBA had refrained from updating the definitions in policies which resulted in the knocking back of legitimate claims on the basis they didn’t meet the outdated definition.

Life insurers have been allowed to sell faulty life insurance policies that contain outdated medical definitions that the companies won’t have to pay out. They have been able to do this because it doesn’t breach the law. This needs to change; so does the code of conduct which in its current form pays lip service to the industry.

The FRLC wants a last resort compensation scheme, something the government has stayed silent on despite sitting on a report completed a year ago.

It is something suggested by the Greens in its submission to the royal commission, as well as a recommendation to release the report in February then undertake further hearings.

The ALP is calling for an extension to the royal commission on the basis its 12-month timeline prevented it going far enough. To put it into perspective, only 27 victims were invited to give testimony, leaving many thousands voiceless. Too many companies and super funds were ignored and others glossed over.

The Greens offer a series of proposals including creating a publicly owned “People’s Bank” to give “affordable” services and inject “real competition” into the sector. Savings accounts would be pegged to the RBA cash rate, with debit cards linked to these accounts also available. Term deposits would be pegged to the Commonwealth bond rate and mortgage tracker accounts pegged to the RBA cash rate.

It also calls for an expanded BEAR, structural separation of financial institutions, an end to value-based commissions on retail grade products, an end to the carve-outs from the best interest duties for retail grade products and an overhaul of regulation.

It proposes the ACCC be the conduct regulator for retail banking, superannuation, insurance, retail grade intermediators (financial advisers and mortgage brokers), and the sale of other retail grade products and services. APRA would continue to be the system (prudential) regulator, but no longer be required to balance this with competition or consumer objectives. ASIC would be the conduct and system (market integrity) regulator over the remainder of the financial system.

Other proposals include the establishment of a financial regulators assessment board, a last resort compensation scheme and an increase in funding for financial counselling and advocacy centres.

Greens senator Peter Whish-Wilson, who has been a regular fixture on a series of inquiries into financial misconduct and was one of the first politicians, along with Nationals senator John Williams to call for a royal commission many years ago, says it’s time to move on from bank-bashing rhetoric to bank-changing policies. “If we all agree the system is broken then it’s incumbent on us all to put forward policies to fix the system.” This means assessing the various proposals with a view to proper reform instead of the usual Groundhog Day of big talk and little action.

Source: https://www.afr.com/business/banking-and-finance/how-to-fix-the-banking-system-in-the-aftermath-of-the-royal-commission-20181028-h1772v

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