Australia's big four banks have emerged from the final report of the Hayneroyal commission with their reputations severely damaged, but with no obvious threats to their core money-making operations apart from higher remediation, compliance and legal costs.
It is a different story for AMP and IOOF Holdings, which will suffer from Hayne's recommendations for an end to grandfathered commissions, annual reviews of financial advice and absolute independence of superannuation fund trustees.
It will be harder in future for manufacturers of funds management and super products to cross-sell these products to in-house customers seeking "independent" financial advice. Hayne pushed back against calls for the dismantling of integrated financial institutions, but such entities will face increased regulation.
The big four banks can cheer because there is nothing in the Hayne report to prevent them earning about $30 billion this year and even more thereafter. Of course, their profits remain hostage to slower credit growth, the rising cost of funding and the slim possibility of increased competition from fintechs and a new, open banking regime.
But there is no Hayne final report discount to be applied to bank stocks, which are already trading at about 10 per cent below their long-term valuations.
It seems bizarre to describe the big four as winners from a forensic analysis of their gross misconduct, especially when Hayne says all took money from customers for no service and at least two were selling superannuation products in branches in breach of the law.
Oligopoly alive and well
But the big banks are winners because their core business, which involves earning a 200 basis point margin on taking deposits and lending to households and businesses, remains intact. The oligopoly is alive and well, albeit with 35 to 40 per cent of its annual investment spend on risk and compliance.
Hayne even made a recommendation about mortgage brokers that would have helped entrench the big four's dominance of home lending. He wanted to replace upfront and trailing commissions (paid by the bank) with an up-front service fee (paid by the borrower).
Treasurer Josh Frydenberg has deferred this recommendation for a review in three years. He has relied on the advice from the Productivity Commission, which found banning mortgage broker commissions would harm competition.
The fear in financial markets and within Treasury and the Reserve Bank of Australia that Hayne would trigger a credit crunch with a recommendation in favour of much tougher responsible lending rules was unwarranted.
Hayne refused to accept arguments in favour of amending the National Consumer Credit Protection Act. He agrees with the Treasury that if banks abide by existing laws it will enhance Australia's macro-economic performance.
That is not to say it will be any easier today to get credit from a bank. Borrowers have to jump through many more hoops. Also, Hayne has told regulators to ensure existing rules are enforced.
One of the biggest disappointments of the Hayne report is the failure to recommend that boards of directors of entities involved in misconduct be held accountable.
Despite uncovering systemic wrongdoing in the financial system, Hayne held back from pointing the finger at the existing governance arrangements. He did call out National Australia Bank chairman Ken Henry for failing to learn the lessons of the past and seeming to be "unwilling to accept any criticism of how the board had dealt with some issues".
But the remaining 35 non-executive directors of the big four banks and directors of other entities names are left untouched.
Hayne says he was surprised how markedly the chairs of three of the big four banks, the CEOs of the five largest banks and AMP and the chairs of the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission differed in the "extent of their engagement with the issues".
"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 to meet the standard.
"That is, there remains a reluctance of 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 express 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. These observations do not apply to all entities."
Source of all wrongs
Hayne blames remuneration incentives as the source of just about all the unethical and illegal problems identified during questioning by the inquiry's chief legal counsels, Rowena Orr and Michael Hodge. And yet, he does little to try and deal with this problem.
He does make recommendations about reforming remuneration packagesto include conduct risks and to set limits on the use of financial metrics in connection with long-term variable remuneration.
But, essentially, Hayne pushes the responsibility for fixing the remuneration issues back on the remuneration committees that were so reluctant over the past five years to rein in short term bonuses and claw back long-term incentives already paid. It is estimated that remuneration committees approved about $250 million in pay packages over the past five years.
However, the Treasurer Josh Fryndenberg's decision to refer 24 possible civil and criminal breaches to regulators, could influence the decisions taken by remuneration committees.
The big four banks have, to a large extent, anticipated many of the recommendations of the Hayne inquiry's final report by withdrawing from superannuation, insurance and wealth management.
Westpac Banking Corp is sticking with its ownership of BT Financial Group and ANZ Banking Group's disposal of its OnePath wealth division to IOOF will probably have to be reviewed. The great bancassurance revolution that started with Commonwealth Bank of Australia's purchase of Colonial almost 20 years ago is now dead.
Hayne's analysis of the role of the key regulators, ASIC and APRA, is as forensic and revealing as his analysis of the main players in the financial system. He explores several ideas for radical change, but concludes the best way to respond to the endemic misconduct is to leave the twin peaks model, which splits responsibilities between APRA and ASIC.
He gives ASIC more power at the same time as the Treasurer says he will get Graeme Samuel to run a capability review of APRA. Given his experience reviewing the governance failings at CBA, Samuel should bring a suitably well informed and sceptical eye to APRA's performance.
Hayne says ASIC should be given all the enforcement powers in the Superannuation Industry Supervision Act in recognition that APRA lacks enforcement skills and its "behind closed doors" approach to regulation is not suited to the need for deterrence through public denunciation and punishment. Also, ASIC will be responsible for enforcement of the Bank Executive Accountability Regime (BEAR) which will be extended to cover other APRA regulated entities. Previously enforcement of the BEAR was the sole preserve of APRA.
It is ironic that ASIC should emerge as a winner from the Hayne inquiry given that Hayne found it treated banks as "clients" and it had an ineffective enforcement culture. Hayne toys with the idea of setting up a specialist civil enforcement agency, but rejects the idea in favour of ASIC being allowed to do its job and take more cases to court.
Hayne is conscious of the perception that a more litigious ASIC will mean higher costs and more time to resolve misconduct issues. He says not litigating does not guarantee faster resolution nor does it reduce the overall cost to the community.
Either way, Chanticleer expects lawyers to do well out of Hayne's new world order in finance.
The biggest winners from the Hayne inquiry could well be the super fund members holding 13 million duplicate accounts which are being levied $2.7 billion a year in unnecessary fees. He says a person should only have one default account.
Industry Super Australia says it supports steps to reduce multiple accounts but legislation to deal with the issue has been met with opposition from Labor in the Senate.
By Tony Boyd
4 February 2019