The Government has released the 3 volume Financial Services Royal Commission Final Report (download here) together with the Government’s Response.

The Commissioner has made 76 recommendations dealing with banking (including consumer and small business lending), financial advice, superannuation, insurance, culture, governance and remuneration, regulators and other matters.

The recommendations are wide-ranging and do not simply deal with the regulatory system but also matters that will have governance risk and compliance impact for financial services providers and their customers.

Volume 1 contains the recommendations, Volume 2 sets out the findings in respect of case studies considered during the rounds of hearings concerning superannuation and insurance (which were not included in the Interim Report) and Volume 3 contains Appendices.

Principles

The recommendations are cross-referenced to reflect the principles Commissioner Hayne followed in making the recommendations:

Simplifying the law so that its intent is met
A general recommendation is that, as far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated. He says the first, and essential, step to take is to reduce exceptions and carve outs.

He argues that the more complicated the law, the harder it is to see unifying and informing principles and purposes: “Exceptions and limitations encourage literal application and focusing on boundary‑marking and categorisation. Boundary‑marking and categorisation may promote uncertainty. Removing exceptions and limitations encourages understanding and application of the law in accordance with its purposes. That is, ‘its intent is met, rather than merely its terms complied with’.”

Conflicts
Where possible, conflicts of interest and conflicts between duty and interest should be removed. Conflicts of interest and conflicts between duty and interest should be eliminated rather than ‘managed’.

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.

The Report takes into account the ASIC Enforcement Review Taskforce Government Response and the Sedgwick Retail Banking Remuneration Review.

Culture, governance and remuneration
He concludes that because primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who manage and control them, effective leadership, good governance and appropriate culture within the entities are fundamentally important. And culture, governance and remuneration are closely connected. Supervision must extend beyond financial risk to non‑financial risk and that requires attention to culture, governance and remuneration.

Increasing protections
There are recommendations that seek to change, or add to, the law, or industry codes of conduct, in ways that will increase protections to consumers from misconduct or conduct that falls below community standards and expectations.

Immediate changes

The Government says it will “take action” on all recommendations subject to matters raised by the Productivity Commission Report on Financial Sector Competition in respect of mortgage broking.

The Labor Party Opposition says it supports all recommendations “in principle”.

The immediate changes (before an election is called) are expected to be:

• extension of the proposed Design and Distribution Obligations  to apply to National Credit Act products and ASIC Act products and the ASIC Product Intervention Powers to apply to ASIC Act products;
• extending the BEAR to all Australian Prudential Regulation Authority (APRA)-regulated entities such as insurers and registrable superannuation entities;
• paying around $30 million in compensation owed to almost 300 consumers and small businesses for the unpaid determinations of the Financial Ombudsman Service and the Credit and Investments Ombudsman;
• establishing an industry-funded compensation scheme of last resort to be administered by AFCA;
• expanding the remit of AFCA for a period of 12 months to accept applications for disputes dating back to 1 January 2008 (the period covered by the Royal Commission) for disputes that fall within AFCA’s thresholds. This will ensure that consumers and small businesses that have suffered from misconduct but have not yet been heard will be able to take their cases to AFCA and have them considered.

National Credit Act

With respect to the National Credit Act, the Government has agreed with the Commissioner’s findings that ‘not unsuitable’ remains the appropriate standard for responsible lending obligations and that the Act should not be amended to extend its operation to lending to small businesses.

But ASIC has already flagged that it is going to issue a revised Regulatory Guide 209 on responsible lending.

The Government has also agreed to:

• requiring mortgage brokers to act in the best interests of borrowers;
• removing conflicts of interest between brokers and consumers by banning trail commissions and other inappropriate forms of lender-paid commissions on new loans from 1 July 2020 with a further review in three years on the implications of removing upfront commissions and moving to a borrower pays remuneration structure; UPDATE: Government decides to not prohibit trail commissions on new loans, but rather review their operation in three years’ time.
•  removing the point-of-sale exemption of retail dealers from the operation of the Act.

Other issues

The Government has accepted the following recommendations:

• ending the grandfathering of the conflicted remuneration provisions for financial advisers effective from 1 January 2021 and, in addition to the Royal Commission’s recommendation, requiring that any grandfathered conflicted remuneration at this date be rebated to clients;
• ensuring superannuation fund members only have one default account (for new members entering the system);
• clarifying and strengthening the unsolicited selling (anti-hawking) provisions, including for superannuation and insurance products;
• prohibiting the deduction of any advice fees (other than intra-fund advice) from MySuper accounts;
• the ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million;
• establishing a comprehensive national scheme for farm debt mediation;
• supporting the elimination of default interest on loans in areas impacted by natural disasters;
• supporting the appointment of receivers or any other form of external administrator only as a remedy of last resort;
• supporting more inclusive practices for Aboriginal and Torres Strait Islander persons;
•  removing the exemption for funeral expenses policies from the definition of financial products for the purposes of the Corporations Act and ensuring that it is clear that the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (ASIC Act) apply to funeral expenses policies;
• mandating deferred sales for add-on insurance products;
• amending the law to provide the Australian Securities and Investments Commission (ASIC) with additional powers to approve and enforce industry code provisions;
•  extending the unfair contract terms provisions to insurance contracts;;
•  clarifying ASIC and APRA’s regulatory roles and powers in superannuation, with ASIC becoming the primary conduct regulator;
• ensuring regulators have access to appropriate powers by creating civil penalties for specific breaches of the law for superannuation trustees and directors;
• creating an independently-chaired regulator oversight body for ASIC and APRA;
• conducting regular capability reviews of both financial regulators, with a capability review of APRA commencing in 2019; and
• expanding the jurisdiction of the Federal Court to cover corporate criminal misconduct to expedite the consideration of cases brought by regulators.

Learning lessons
In respect of corporate culture Commissioner Hayne concluded:

“Unwillingness to recognise and to accept responsibility for misconduct explains the prolonged and repeated failures by large entities to make breach reports required by the law. That same unwillingness explains the prolonged negotiation with the regulator about what should be done in response to misconduct, whether by compensating affected customers or altering defective practices and processes.

There remains unwillingness, in at least some entities, to recognise and give effect to the obligation to ensure that the relevant services are provided efficiently, honestly and fairly, without first having the regulator agree with what the entity judges to be required in order to meet that standard.

That is, there remains a reluctance in some entities to form and then to give practical effect to their understanding of what is ethical, of what is efficient honest and fair, of what is the ‘right’ thing to do. Instead, the entity contents itself with statements of purpose, vision or values, too often expressed in terms that say little or nothing about those basic standards that underpin both the concept of misconduct and the community’s standards and expectations.”