The central task of the commission has been to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations.
Conduct by many entities… has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. Very often, the conduct has broken the law… [It] has fallen short of the kind of behaviour the community not only expects of financial entities but is also entitled to expect of them.
First, in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business.
Providing a service to customers was relegated to second place. Sales became all-important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond frontline service staff. Advisers became sellers and sellers became advisers.
Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law. Rewards have been paid regardless of whether the person rewarded should have done what they did.
Second, entities and individuals acted in the ways they did because they could. Entities set the terms on which they would deal, consumers often had little detailed knowledge or understanding of the transaction and consumers had next to no power to negotiate the terms.
Third, consumers often dealt with a financial services entity through an intermediary. The client might assume [that the intermediary] acted for the client and in the client’s interests. But in many cases the intermediary is paid by, and may act in the interests of, the provider of the service or product.
The interests of client, intermediary and provider of a product or service are not only different, they are opposed. An intermediary who seeks to “stand in more than one canoe” cannot. Duty (to client) and (self) interest pull in opposite directions.
Experience shows that conflicts between duty and interest can seldom be managed; self-interest will almost always trump duty.
Fourth, too often financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished.
Wrongdoing is not denounced by issuing a media release… The community also expects that financial services entities that break the law will be held to account.
There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management… Everything that is said in this report is to be understood in the light of that one undeniable fact.
On the National Australia Bank
I am not as confident as I would wish to be that the lessons of the past have been learned. More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly.
I thought it telling that Dr Henry [Ken Henry, NAB chairman] seemed unwilling to accept any criticism of how the board had dealt with some issues. I thought it telling that Mr Thorburn [Andrew Thorburn, NAB chief executive] treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and NULIS [NAB’s superannuation arm] on this account is likely to be more than $100 million.
I thought it telling that in the very week that NAB’s CEO and chair were to give evidence before the commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas. Overall, my fear — that there may be a wide gap between the public face NAB seeks to show and what it does in practice — remains.
The six principles the financial services industry should follow
- Obey the law.
- Do not mislead or deceive.
- Act fairly.
- Provide services that are fit for purpose.
- Deliver services with reasonable care and skill.
- When acting for another, act in the best interests of that other.
The six norms of conduct support
- The law must be applied and its application enforced.
- Industry codes should be approved under statute and breach of key promises made to customers in the codes should be a breach of the statute.
- No financial product should be “hawked” to retail clients.
- Intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary.
- Exceptions to the ban on conflicted remuneration should be eliminated.
- Culture and governance practices (including remuneration arrangements), both in the industry generally and in individual entities, must focus on non-financial risk, as well as financial risk.
Recommendations: answering the key questions
1. Simplify the law so that its intent is met
As far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated.
The first, and essential, step is to reduce exceptions and carve-outs. The more complicated the law, the harder it is to see unifying and informing principles and purposes.
Several recommendations propose the removal of exceptions and limitations in the existing law and industry codes. They relate to the point of sale exemption for retail dealers (from consumer credit law); grandfathered commissions (for mortgage brokers); life risk and general insurance commissions; funeral expense policies; insurance claims handling and settlement; and the definition of “small business” in the Banking Code of Practice.
As far as possible, legislation governing financial services entities should identify expressly what fundamental norms of behaviour are being pursued when particular and detailed rules are made about a particular subject matter.
Where possible, conflicts of interest and conflicts between duty and interest should be removed. There must be recognition that conflicts of interests and conflicts between duty and interest should be eliminated rather than “managed” (as existing legislation now envisages).
Several recommendations deal with conflicts of interest or conflicts between duty and interest. They include the recommendations that mortgage brokers owe borrowers a best interests duty [and that] financial advisers disclose any lack of independence.
Enforced separation of [financial] product and advice would be a very large step to take. It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs… I am not persuaded that it is necessary.
3. Regulators and compliance
The recommendations seek to improve the effectiveness of the regulators in deterring misconduct and ensuring that there are just and appropriate consequences for misconduct.
Some recommendations seek to increase the ways in which the regulators can enforce the law. Some recommendations relate to the governance and performance of APRA [the Australian Prudential Regulation Authority, responsible for ensuring the stability of the financial system] and ASIC [the Australian Securities and Investments Commission, responsible for ensuring trustworthy conduct within that system]… and re-adjust [their] roles.
A new oversight authority for APRA and ASIC, independent of government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects.
4. Culture, governance and remuneration
Effective leadership, good governance and appropriate culture within the entities are fundamentally important. And culture, governance and remuneration are closely connected. It must now be accepted that regulators have an important role to play in supervision of these matters.
APRA should require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct.
APRA should [focus] on building culture that will mitigate the risk of misconduct;… assess the cultural drivers of misconduct in entities; and encourage entities to give proper attention to sound management of conduct risk and improving entity governance.
5. Increasing protections
The commissioner outlines a range of recommendations in specific problem areas, such as enacting a national scheme for mediation between banks and farmers on “distressed agricultural loans,” requiring that clients specifically approve advisers’ fees each year, prohibiting hawking superannuation and insurance products, ensuring that each worker has just one default superannuation account, and establishing a “compensation scheme of last resort” for victims wronged by firms unable to repay them.
These recommendations seek to improve the law to protect consumers from the misconduct and conduct that fell below community standards and expectations identified by the commission.
They are recommendations for changes that will reduce the chance that conduct of the kinds identified will happen again, or happen again with the same effect for consumers.
Choices must now be made. The damage done to individuals and to the overall health and reputation of the financial services industry has been large. Saying sorry and promising not to do it again has not prevented recurrence.
The time has come to decide what is to be done in response to what has happened. The financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again. •