What is the impact of the Banking Royal Commission on Australia?
In February 2019, Commissioner The Honourable Kenneth M Hayne released the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The report sheds light on the results of the inquiry into the alleged misconduct of Australia’s banking and financial services industry and proposes 76 recommendations. This follows the review of over 10,000 public complaints about Australian financial services and seven rounds of public hearings calling more than 130 witnesses.
The aim of this exercise was to have a better understanding of the systematic failures leading to the public complaints rather than simply resolving them. As such, the limitation of the report is that it did not provide compensation to affected consumers. However it is expected that if all 76 recommendations are implemented, there will be a better legislative framework in place to ensure that the financial industry is acting ethically.
What is the impact of the Banking Royal Commission on the job market?
In light of the Banking Royal Commission, we have seen a surge in the demand for risk and compliance workers across all sub-segments of the financial services including insurance sectors, by more than 48% according to SEEK. However, the workforce in other areas of finance have decreased – an example being National Bank of Australia (NAB) announcing its downsizing plans by a net of 4,000 employees from 33,422. According to SEEK, Australian Prudential Regulatory Authority (APRA) will potentially start to review banks’ internal risk processes with banks absorbing the costs. This however seems to encourage banks to offset such costs through job cuts. The graph below illustrates the contrast between the high demand for risk and compliance as opposed to other parts of the financial services industry that witnessed a decrease in demand.
However, the demand for individuals with a niche compliance and risk skillset is yet to be met with the availability of candidates across the New South Wales, Brisbane and Perth markets. This is mainly due to companies specifically seeking candidates with skills in conduct, service commission models and advice. Statistics provided by SEEK further indicates that there has only been a 13% increase in the number of candidates looking for a compliance and risk role in comparison to the 48% increase in demand nationwide.
Kendra Banks, ANZ Managing Director from SEEK commented that “with the latest regulations on GDPR and several breaches seen across global businesses, it’s likely this has also contributed to the number of compliance and risk roles made available.”
To bridge the gap between the demand and availability of risk and compliance specialists, the industry is open to individuals who are able to apply transferable skills and encourages applications for junior positions that are currently averaging a full time salary of $74,142 and senior positions at $130,776.
What measures did the government take to address the recommendations?
The government has agreed to take action on all 76 recommendations and further proposed a compensation scheme of last resort funded by the industry. This scheme is relevant to the 300 customers who had the tribunal win in their favour but received no compensation. It is expected that affected customers will be compensated for approximately $30 million. The government also agreed to simplify financial services law to ensure that the law’s intent is met. In this respect, the government further commented:
“The Royal Commission has noted that over-prescription and excessive detail can shift responsibility for behaviour away from regulated entities and encourage them to undertake a ‘box-ticking’ approach to compliance, rather than ensuring they comply with the fundamental norms of behaviour that should guide their conduct”.
What are examples of recommendations issued?
Following the inquiry of the Royal Commission, banks have been under greater scrutiny and experienced the risk of potentially reduced margins, reputation damage and lower credit ratings. Hayne reported 24 instances of potential criminal conduct to Australian Securities and Investments Commission (ASIC) for further investigation. In the report, Hayne blamed banks’ senior executives for charging the dead for financial advice, lending those with no capacity to repay and providing financial advice to the institution’s best interests rather than the consumer’s. Hayne also indicted senior executives for purposely misleading regulators – ASIC and APRA.
Amongst Hayne’s 76 recommendations, we note the following key points:
- Mortgage broker changes: Mortgage brokers will no longer have trailing commissions as of July 2020 in an attempt to improve standards and prevent misconduct. Upfront commissions will also be replaced by a customer-paid fee with Hayne stating that “the borrower, not the lender should pay the mortgage broker a fee for acting in connection with home lending”. Mortgage brokers will also be subjected to the same applicable laws and regulations to financial advisors and are required to act in the best interests of borrowers or face civil penalties.
- Charge for service not provided: In the event that financial advisors charge their clients for a service that was not provided, this could be considered an offence that could attract jail time of up to 10 years.
- Bank services requiring customer consent: Banks will be required to obtain their customers’ written consent every year prior to charging them fees for services. Furthermore, dishonour fees on basic accounts and overdrafts in these accounts will be banned unless they have been agreed to by customers.
- Farmers to receive loan relief amidst natural disasters: A national mediation scheme will be set up to help farmers who are struggling to repay loans. Default interest will be waived on loans in areas affected by drought and natural disasters. Realistic repayment schemes are also to be provided by financial advisers with a working knowledge of the agricultural sector.
- Car dealerships subjected to federal consumer credit laws: Car dealerships and other retailers are not likely to be exempted from the Australian consumer credit laws. Car dealers will also face a cap on commissions for add-on insurance sales.
- Changes to superannuation: Individuals will only have one default superannuation industry account and there will be a ban on advice fees on MySuper accounts. Unsolicited sale of superannuation should also be stopped.
- Changes to the sale of life insurance products: Cold calling customers to sell insurance should be banned and ASIC should lower commissions on the sale of life insurance products.
- Value of land not to be determined by banks: The report calls for independent assessments of the value for land and agricultural holdings in cases where the customer has an outstanding loan with a bank. The value is currently determined by the bank who will repossess the asset should farmers be unable to repay the loan.
How are the big 4 Australian banks affected?
Australia’s financial services sector is the largest contributor to the economy with an injection of approximately $140 billion to GDP annually and employs around 450,000 individuals nationally. The banking sector in Australia is dominated by four major banks: Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), Australia and New Zealand Banking Group (ANZ), and NAB.
The ongoing investigations are expected to cost each bank a minimum of $50 million to cover lawyer and advisory fees to manage the inquiry on their behalf. The Commission has also shifted the banks’ focus towards the collation of information and provision of evidence in response to investigation enquiries rather than focusing on rebuilding their investors’ and customers’ trust in the bank. Australia’s two watchdogs – APRA and ASIC have joined forces to monitor banks’ lending practices, especially when determining a borrower’s ability to repay interest-only and investor loans.
What happened to NAB following the Banking Royal Commission inquiry
- Following the resignations of NAB’s Chief Executive Officer Andrew Thorburn and Chairman Ken Henry, NAB announced that Thorburn will receive an exit payment of more than $1 million in lieu of 26 weeks’ notice but all his unvested deferred awards would be forfeited.
- NAB also reported it would hire head-hunters with a global reach to find their new CEO and chairman. The ultimate hiring decisions will be made collectively by the board. Henry will stay on until the new Chairman is elected but will not sit on any of the two selection panels.
- In the interim, NAB has elected one of its directors – Phil Chronican as acting CEO. Chronican will be paid $150,000 a month when he starts in his new role in March and will not be eligible for any bonus scheme.
On the look-out for risk and compliance candidates?
At Huxley, we have our clients’ and candidates’ best interests at the very core of our business. If you are thinking about how the Banking Royal Commission may impact your business or yourself as an employee, do not hesitate to give us a call on 02 8251 2100. Our Risk and Compliance specialist team will also reach out to you shortly after to share further insights with you.