The nation’s economic health, growth, jobs, investment and household prosperity are at stake as the Morrison government and the opposition respond to royal commissioner Kenneth Hayne’s final report. Amid federal election campaigning and a credit squeeze in which banks have been rejecting up to half of all home loan applications, a populist race between politicians to see which side can crack down hardest on the sector needs to be avoided. As the Property Council of Australia warned yesterday, it is important for policymakers “not to break the economy” as they set about fixing the banks. Anti-capitalist hysteria such as Greens leader Richard Di Natale’s call to break up the banks and set up a publicly owned “People’s Bank’’ must have no place in the fallout.
Mr Hayne, consistent with his interim report in September, has produced a clear, measured and sobering final document which presents major challenges not only to government but to law enforcement agencies and the banking, insurance superannuation, financial advice sectors. Its recommendations are proportionate to the serious abuses and costly shortcomings for customers his royal commission uncovered during 11 months of hearings. Long experience, including that of the GFC, attests to the fundamental strength of the banking sector. To the extent that strength has been perverted by corruption and in some cases criminality, the misconduct must be dealt with and atoned for by the executives and institutions responsible, and trust restored as a matter of urgency. The commission’s move to extend the Banking Executive Accountability Regime, which covers executive pay, to the entire financial services sector, is overdue.
After uncovering worse than expected conduct, mainly involving banks charging customers fees for nothing in return, it was not surprising that Mr Hayne recommended criminal charges that carry a maximum fine of $94.5 million against two institutions. This is in addition to a case the Australian Securities & Investments Commission is already considering prosecuting. Mr Hayne also referred 19 further breaches of the law by companies such as the Commonwealth Bank, NAB, ANZ, AMP and IOOF for further investigation. All banks, their boards and executives face the long, hard task of reforming their culture and conduct. From yesterday’s report, it appears that the challenge will be hardest for the National Australia Bank, whose chairman, former Treasury secretary Ken Henry, and chief executive Andrew Thorburn were singled out for failing to accept “necessary responsibility”. Mr Hayne found that NAB “stands apart from the other three major banks’’.
The royal commission also responded comprehensively to widespread dissatisfaction with superannuation. The recommendation that each person have only one default account would eliminate the proliferation of 10 million fee-draining unintended multiple accounts — a problem previously identified by the Productivity Commission. Members’ interests would also be better protected by Mr Hayne’s recommendation that in appointing directors, the so-called “equal representation model” — under which unions and employer groups nominate officials to govern super funds — be scrapped in favour of directors being chosen on merit.
While recommending a new regulatory oversight body and more co-operation between ASIC and the Australian Prudential Regulation Authority, Mr Hayne wisely resisted calling for a new plethora of red tape that would over-regulate the sector at the risk of stymieing economic activity. As in his interim report in September, he emphasised “the first general rule’’ — that the law must be applied and its application enforced. That is a sound guiding principle on which ongoing reform should be based.
At a time when real estate prices in Sydney and Melbourne are tumbling and banks are rejecting about half the loan applications they receive, Mr Hayne, did not recommend further strictures on bank lending — a decision that will serve the best interests of households and business. He acknowledged that the steps already taken by banks to strengthen home lending practices were intended to improve compliance with responsible lending provisions. Any “tightening’’, he said, was the result of complying with the National Consumer Credit Protection Act.
One of the report’s most contentious recommendations — the only one out of 76 that Treasurer Josh Frydenberg has not accepted in its entirety — relates to mortgage brokers. Mr Hayne recommended that mortgage brokers should be required to act in the best interests of their clients, who in future would pay their fees, rather than in the interests of financial institutions, which provide incentives for brokers to steer borrowers in their direction. The government accepts that brokers should act in the best interests of their clients. But out of an understandable concern for borrowers’ costs, Mr Frydenberg stopped short of endorsing the commissioner’s call for borrowers to pay the cost of mortgage broking up-front, promising to review the recommendation within three years.
The opposition, which may be implementing the report in the next few years, accepted all recommendations. It will make much of the fact that Labor pushed long and hard for the royal commission and the Coalition resisted. But judging by the government’s response to the report yesterday, there was no justification for Bill Shorten’s claim that the Coalition “could not be trusted to get tough with the banks’’. Nor is that the most important challenge arising from the commission. Amid international economic uncertainty, the most complex task for the government is making oversight of Australia’s financial sector more effective, while ensuring banks remain sufficiently strong and flexible in providing the finance investors need to maintain economic growth.
5 February 2019