Even after settling several banking scandals, including money laundering, terrorism financing and automated loan approvals, professional misconduct remains rampant in the Australian financial services sector. The Hayne Royal Commission was established as an official public investigation, receiving over 10,000 submissions from the public and going through eight months of public hearings.
The Commission’s final report was a sadly unsurprising exposé, which admonished a perturbing culture that empowered a blinding pursuit of profit at all costs through conscious breaches of the law and both social and professional ethics. Kenneth Hayne AC QC believes that this culture, along with lacking leadership and internal and external governance, are the key issues.
By publicly exposing, condemning (sometimes scathingly) and attempting to fix wrongdoing, the Commission should be considered a win. However, these breaches are so pervasive within our financial and economic institutions that engendering real change will be difficult. Let’s take a closer look at what the Commission uncovered.
This is the industry where the well-known ‘fees for no service’ misconduct occurred. Periodic “advice” or “service” fees were charged without the provision of any services, or even billed to deceased clients. But financial services firm AMP extended this dishonesty by deliberately misleading regulators over 20 times in a desperate attempt to exonerate themselves.
The lack of independence of financial advisers has also led to ‘poor advice’. Their roles[FL1] have become a perplexing mix of an unbiased adviser and a commissioned seller, which is a clear conflict of interest – they cannot be unbiased or ensure the appearance of objective advice if they profit from selling specific financial products. To advise other products would be their loss, even if such advice is in the best interests of clients.
Amongst other matters, the investigation exposed a continuing lack of prudent and proper income verification prior to loan approvals. Since riskier loans yield more profits, banks have an incentive to push out as many tenuous loans as possible. The Global Financial Crisis should have already taught us the dangers of an accumulation of these transgressions, where the deliberate ignorance of risk resulted in countless securities to be predicated on a non-existent bubble of value. Once it burst, $19.2 trillion and 8.8 million jobs vanished.
Other examples and systemic issues
For the insurance and superannuation industries, case studies exposed aggressive and predatory sales tactics, and the promotion of dodgy financial products that were never in the best interests of the client. In one case study, insurance agents were actually trained to use aggressive strategies and to sell at all costs.
Certain demographics are also systemically disadvantaged. The Commission found that farmers must be supported, not complicated, by dealings with banks when they encounter financial distress they are typically vulnerable to. Several practical recommendations are expected to be implemented.
For Indigenous Australians, basic financial needs and accessibility are a challenge. In a relatively limited discussion, it was identified that Aboriginal and Torres Strait Islander people face difficulties in accessing basic financial services due to verification practices, and that the financial system is insufficiently flexible to accommodate for their circumstances. The Commission’s recommendations seek to alleviate this, but leave plenty of room for more innovative solutions.
The Commission’s main observations were that:
- Almost every instance of misconduct was driven by the culture and structure of remuneration.
- Corporate culture and the structure of bonuses and commissions rewards profit generated dishonestly or unethically.
- Misconduct could take place due to large information asymmetry.
- The knowledge discrepancy between the financial institution and customer is highly conducive to illegitimate behavior.
- Financial matters are not common knowledge for ordinary customers, making misconduct easy to obscure.
- There are rampant conflicts of interests.
- The customer’s interests (and money) are vulnerable and have often been secondary to the interests of the service provider.
- The financial services sector is unique because it has allowed, and even incentivized, prolonged conflicts of interests.
- The lack of effective punishment has fostered a dysfunctional sense of accountability.
- Mere compensatory punishment and public apologies has failed to deter and prevent recurrence.
These prevailing issues were exploited for substantial gain, for which Hayne mostly holds boards and senior management culpable, since they have the greatest influence and control over risk management, culture, compliance and transparency. He also calls for more stringent and effective regulatory action by APRA and ASIC in exercising their powers to punish and deter misconduct, where compensation is inapt forsuch large corporations.
A sad win
Developed nations have become heavily reliant on financial services, and Australia is no exception. A well-developed financial system is an important international competitive advantage and a critical part of an economy for any class of persons, which is why upholding its integrity and accessibility is so important. Upsettingly, the need for a Royal Commission already reflects the dwindling trust and integrity of the financial sector.
Of the 76 recommendations that strive to address all the above issues, some have been actioned by Parliament and more are expected. But another upsetting reality is that it will be significantly challenging to implement a genuine cultural change. A blindly profit-driven mindset that repeatedly leads to deceit and exploitation will remain swimming in the murky waters of conflicts of interest that continue to be tolerated.
years of outright and pervasive greed, perhaps the saddest reality is that it
took a grandiose Royal Commission to point out the simplest, most basic of
moral and ethical truths to an entire sector. It’s still a small win, but a sad
Jordana, L. (2018). AUSTRAC and CBA agree $700m penalty. Retrieved from https://www.austrac.gov.au/austrac-and-cba-agree-700m-penalty.
 Long, S. (2018). Westpac exposed to potential lawsuit over billions of dollars in irresponsible home loans. Retrieved from
 Royal Commission into Misconduct in the Banking, superannuation and Financial Services Industry. (2019). Final Report (p 148). Australia. (‘Royal Commission Report’).
 Janda, M. (2018). Banking royal commission: AMP loses count of how many times it misled ASIC. Retrieved from
 Royal Commission Report (p 119).
 U.S Department of Treasury. (2012). The Financial Crisis Response. Retrieved from https://www.treasury.gov/resource-center/data-chart center/Documents/20120413_FinancialCrisisResponse.pdf.
 Royal Commission Report (p 298).
 Royal Commission Report (p 93).
 Royal Commission Report (p 1).
 Royal Commission Report (p 392).
[FL1]Not firms, advisers specifically