06 February 2019

Hayne Outcomes

In Casablanca Captain Renault blows his whistle and shuts down Rick's Cafe, announcing that he's "Shocked! Shocked" to discover that there's gambling on the premises. He then politely accepts his winnings. There's something of the same "shocked" in the Treasurer's response to the final report of the Hayne Royal Commission on misbehaviour in the financial services sector.

The Treasurer's formal response  states - oh so convincingly - that
My message to the financial sector is that misconduct must end and the interests of consumers must now come first. From today the sector must change, and change forever. 
The response goes on
 Commissioner Hayne’s recommendations and the Government’s response advance the interests of consumers in four key ways. First, they strengthen and expand the protections for consumers, small business and rural and remote communities. Second, they raise accountability and governance standards. Third, they enhance the effectiveness of regulators. Fourth, they provide for remediation for those harmed by misconduct. For the first time the Government will establish a compensation scheme of last resort to ensure that consumers can have their case heard and be confident that where compensation is owed it will be paid. This will be a scheme paid for by industry reflecting their obligation to right their wrongs.... 
The Government is confident that the actions announced today will put in place the legislative framework necessary, providing the regulators with the powers and the resources to hold those who abuse our trust to account. In doing so the community’s trust in our financial sector can and will be restored.
That restoration might of course not be immediately forthcoming.

The response offers the usual excuse -
On coming into office in 2013, the Government inherited a financial system in need of reform. While the system had withstood the challenges of the global financial crisis, high profile financial collapses had highlighted gaps in how the regulatory framework protected consumers and investors and there was a clear need to further improve its resilience. As part of the Government’s comprehensive economic reform agenda, in 2013 we established the Financial System Inquiry (FSI), a root and branch examination of Australia’s financial system. Since the release of the Government response to the FSI in 2015, the Government has diligently been implementing its recommendations.
Hayne questions the diligence.

The response states
Those reforms, and other measures announced subsequently, have made significant progress in ensuring the financial system is resilient, treats consumers fairly and is overseen by effective regulators. The Government has also promoted innovation and competition, the benefits of which are already evident. This response, coupled with the reforms already made or in the process of being implemented, represent the most significant changes to the financial system in a generation. The Government will build on its existing reforms 
The Royal Commission has endorsed many of the themes and individual reforms the Government is currently pursuing. However, the Royal Commission has also found that there is further work to be done. The Government agrees. 
The Royal Commission has shone a spotlight on the extent of wrongdoing and misconduct across the financial system. It has identified entities putting profits ahead of people and rewarding misconduct, a lack of accountability for those who broke the law, and regulators who need to be more effective in denouncing and punishing misconduct. 
This response will address the issues identified by the Royal Commission and substantially build on the Government’s existing agenda by:
  • strengthening protections for consumers, small businesses and rural and regional communities; 
  • enhancing accountability; 
  • ensuring strong and effective financial system regulators; and 
  • further improving consumer and small business access to redress.
In undertaking these reforms, the Government will ensure that the financial system continues to provide consumers and small businesses with access to credit and other affordable financial services that they need, and that the financial system remains competitive, efficient and resilient.
Strengthening protections for consumers, small businesses and rural and regional communities 
All Australians have the right to be treated fairly and honestly in their dealings with financial services entities. It is fundamental to ensure consumers have trust in the financial system. We have already reformed remuneration practices in the life insurance advice sector and introduced new educational and ethical requirements for financial advisers. We have protected consumers from being granted excessive credit limits and building up unsustainable debt across credit cards, and simplified how interest is calculated. Legislation is before the Parliament to ensure financial products are appropriately targeted and to give the Australian Securities and Investments Commission (ASIC) the power to intervene to prevent consumer harm.
Importantly, ASIC - along with other regulators - must have a willingness to actively influence corporate behaviour by using its powers. That is as important as the proposed legislation
Legislation is also before the Parliament which contains a comprehensive package of reforms designed to protect Australians’ superannuation savings from undue erosion by fees and insurance premiums, and to improve outcomes for members of superannuation funds. 
We will further strengthen these protections, including by:
  • 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;  
  • ending the grandfathering of the conflicted remuneration provisions 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); 
  • protecting vulnerable consumers through 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; 
  • supporting the expansion of the definition of small business in the Banking Code; 
  • 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; and 
  • supporting more inclusive practices for Aboriginal and Torres Strait Islander persons.
The Royal Commission has also put industry on notice that it must step up and improve how it deals with distressed agricultural loans. 
Enhancing accountability 
It is the responsibility, first and foremost, of entities, their boards and senior executives to comply with the law, meet community standards and expectations, and treat their customers fairly. Nevertheless the regulatory framework must make it clear that where entities and individuals within them fail to meet their obligations they will be held to account. 
We have established the Banking Executive Accountability Regime (BEAR) which ensures banks and their executives are held accountable when they fail to comply with their obligations. 
Legislation is before the Parliament to significantly increase penalties, both civil and criminal, so that they are an effective deterrent to, and remedy for, corporate and financial misconduct. We have also introduced legislation for a single whistleblower protection regime to cover the corporate, financial and credit sectors. We will make entities and individuals more accountable, including by: • extending the BEAR to all Australian Prudential Regulation Authority (APRA) regulated entities such as insurers and registrable superannuation entities; • in addition to the Royal Commission’s recommendations, introducing a new conduct focused accountability regime, regulated by ASIC and extending its coverage to non prudentially regulated entities; • increasing the requirements for entities to investigate the full extent of financial adviser or mortgage broker misconduct and inform and remediate customers that are affected; and • establishing a new holistic approach for disciplining financial advisers for misconduct through a central body. 
The Royal Commission has also made a number of recommendations to APRA to bolster its focus and supervision of culture and governance and the Government supports APRA acting on these recommendations.
On the regulator front
Ensuring strong and effective financial system regulators 
For Australians to have trust in the financial system, the regulatory framework must be enforced by effective regulators. The Government has taken significant action to increase the capabilities, powers and funding of the financial regulators, and to refresh their leadership. We have also introduced or consulted on a number of pieces of legislation, including in respect of many of the recommendations of the 2017 ASIC Enforcement Review, to ensure our financial regulators have the powers they need to take strong action to protect consumers from corporate and financial sector misconduct. Additional funding of $170 million has also been provided to ASIC, APRA, the Commonwealth Director of Public Prosecutions and the Federal Court to ensure our regulators are appropriately resourced to hold those who engage in misconduct to account. 
We will ensure our regulators are strong and effective, including by: • 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, and applying accountability principles consistent with the BEAR to the regulators themselves; • 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.
In an elegant evasion the response states
While these reforms are critical, much of the needed change must come from the regulators themselves. 
The Government welcomes the actions the regulators are taking to begin changing their practices, including a tougher approach to enforcement and more intensive supervision approaches. While the Government has also provided significant funding to the regulators, the findings and recommendations from the Royal Commission, along with more than 20 referrals, will require the regulators to take on new responsibilities and, in many cases, simply do more. 
The Government will work with the regulators to ensure that they remain appropriately resourced and will consider what additional funding is required in the 2019 20 Budget context.
Given the 'reddress' concerns highlighted by Hayne  ...
Further improving consumer and small business access to redress 
Consumers have a right to be protected from misconduct or conduct that falls below community standards and expectations. They also have a right to redress when there are breaches of the law. 
The Government has implemented important reforms to ensure this redress occurs. We have established the Australian Financial Complaints Authority (AFCA) — a one stop shop for external dispute resolution to enable more consumers and small businesses to access fast and free dispute resolution including for banking, insurance, superannuation and financial advice. AFCA operates with higher compensation limits than its predecessors — for consumers ($500,000), for small businesses ($1 million) and primary producers ($2 million). 
ASIC has also been provided with additional powers to allow it to set standards in relation to financial entities’ internal dispute resolution practices and to collect data from entities on these activities. 
We will further improve consumer and small business access to redress by going beyond the Royal Commission’s recommendations by: • 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 for the first time an industry funded and forward looking compensation scheme of last resort to be administered by AFCA as recommended by the Royal Commission; • 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; and • strengthening oversight and transparency of financial entities’ remediation activities by enhancing AFCA’s role in the establishment and public reporting of firm remediation activities. 
In recognition of the need for greater stability and coordination of funding for financial counselling across Australia, the Government will also commence an immediate review of the coordination and funding of financial counselling services.
And re implementation
Implementing the reforms to achieve lasting change 
The Government will ensure these reforms are implemented efficiently and effectively. To achieve these goals, the Treasury Royal Commission Taskforce, which made several submissions to the Royal Commission, will continue as a Financial Services Reform Implementation Taskforce. To ensure ongoing coordinated delivery of reforms, a Financial Services Reform Implementation Committee will also be established consisting of the Treasury, ASIC, APRA, the Office of the Parliamentary Counsel and other agencies as required. 
Starting in three years, the Government will establish an independent inquiry to review and assess whether industry practices have changed following the Royal Commission and have led to better consumer outcomes. 
The Government will also require a similar assessment of the regulators in three years by the new regulator oversight body that the Government has agreed to establish Treas