What the Interim Royal Commission Report said and key outcomes

The 941 pages over three volumes of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is substantial – both in size and in impact on the Australian Banking and Financial Services Industry.

The two fundamental messages from the report were that ‘short term profit was pursued at the expense of basic standard of honesty’ and ‘when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.’

Much of the report details the failures of the banks that has been well reported by the media over recent months. Clearly people have been shocked by the findings that have emerged almost nightly on the evening news. As Anna Bligh, the Chair of the Australian Banking Associating described, the banks ‘failed customers, failed to obey the law and failed to meet community standards.’

Notably, the interim report does not make a series of recommendations on new rules, regulations or laws, but puts forward many hundreds of questions and some very specific observations. Some questions are fundamental to the industry, such as ‘is structural change in the industry necessary?’

Further, the report tells us ‘the law already requires entities to do all the things necessary to ensure that the services they are licensed to provide are provided efficiently, honestly and fairly.’ Going further, suggesting that new laws would add complexity to an already complex regulatory regime, it asks ‘should the law be simplified’ to reflect basic standards of fairness and honesty.

The report further challenges the administration and enforcement of the laws and regulation by APRA and ASIC.

Initial responses

Australian banks directly and via the Australian Bankers Association have respectfully welcomed the release of the report, noting the confronting nature of the findings, the failures made by banks and the critical reflection on the industry. They have accepted the need to improve outcome for their customers. The banks have undertaken a detailed examination of the interim report and made submissions to the Royal Commission to address many of the questions raised.

The Government, led by the Treasurer Josh Frydenberg accused ‘Australia’s banks of taking the law into their own hands and holding Parliament, the courts and regulators in contempt.’ He questioned the approach of the regulators and noted the importance of a ‘healthy, robust and strong financial system.’ The opposition acting Leader Tanya Plibersek supported the Royal Commission position stating: ‘It would be surprising if the Royal Commission made recommendations that we were not able to support.’ With a Federal election due by mid-2019, the process of accepting recommendations is likely to be highly politicised.

ASIC Chairman James Shipton welcomed the report, noting the serious and important observations of ASIC’s role as regulator.

Banks and other interested parties submitted their responses for the CEO, Chair and Regulator hearings held throughout late November.

How the banks are already responding

While the banks, together with their lawyers and advisors, prepared detailed structured responses to the interim report due on the 26 October, they are not waiting on the final report to take action. Some of the actions underway are telling, and include:

  • The banks through their CEOs and senior officers have publicly acknowledged that conduct at times has fallen short of community expectations and that changes are required at the banks to address the shortcomings
  • Significant structural changes have been announced at a number of the largest banks, where they will divest their wealth management and/or insurance businesses
  • A numbers of executives have resigned
  • Large remediation programs have been underway, in some cases for a number of years, reviewing historical advice or transactions. Where the banks (together with oversight from the regulators) have assessed that customers have been impacted, they have provided compensation
  • Some banks have dedicated programs in place to address identified issues, with significant dedicated budget and resource
  • Product simplification exercises, where banks are looking to reduce the total number of products on offer and replacing more complex offerings with more straightforward ones
  • Remunerations of some exiting and former executives have been affected, including the elimination/reduction of current bonuses, reduction of director fees and the cancellation/reduction of deferred bonus relating to prior years
  • Staff (re)training exercises to reinforce compliance, legal and ethical responsibilities

For more commentary from Deloitte on the Interim Report click here

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