Kenneth Hayne was only meant to examine misconduct in the financial services industry, yet the market whipped itself into a frenzy expecting him to fix an industry that actually wasn’t necessarily broken.
An ethical and cultural wasteland, yes, but not a complete train wreck.
Yesterday’s rally in bank stocks was the start of the undoing of about $7 billion in short positions against the industry.
On an individual stock basis the short positions are not huge, with Commonwealth Bank leading at a 2.1 per cent short position at the end of January, and after underperforming the market by some 3.5 per cent over the past six months yesterday’s gains were understandable.
As was Mortgage Choice, the broking house, which saw its stock smacked 25.2 per cent to 77c a share yesterday, down from $2.54 this time last year.
Hayne didn’t recommend the mass structural changes or remuneration crackdowns this column and others urged, but then again, with appropriate oversight the industry should be able to manage itself, given that common sense demands that customers be the No 1 priority.
The National Australia Bank leadership of Ken Henry and Andrew Thorburn — as expected — have with some credence rejected outright Hayne’s interpretation of their behaviour and maintain they will be in the job for the foreseeable future.
A punter would lay money on both being gone by the middle of 2020 in a staged handover.
The Ethics Centre’s Simon Longstaff is considerably more impressed by Hayne’s efforts, with commendable focus on changing the law to meet the ethical standards and a company-wide focus on culture and governance.
This requires discipline in regularly reviewing standards, identifying any problems, dealing with them and then working out if the changes are effective.
Then it’s up to APRA to monitor the impacts and operation of the ethical framework.
A series of other changes are worthwhile, including removing conflicts on Superannuation Trustees, based on the simple principle that they should prioritise the best interests of the beneficiaries.
Josh Frydenberg said this week he could change the law but the banks had the clear framework to make the changes now.
The mortgage brokers have some adjustments to do and will defend their conflicted pay with the excuse that they are increasing competition in the industry by benefiting second-tier mortgage providers.
Hayne noted that if an adviser stood to benefit from clients acting on their advice then a conflict existed and from that standpoint the industry has some work to do.
This should mean reduced platform costs as integrated companies like AMP adjust to increased costs on the advisory side of their business.
APRA has the task of improving its ability to monitor conflicts.
ASIC too has a role in banning products which set remuneration around distribution networks.
The ACCC has a long-term project aimed at lowering the barriers to entry in the industry, starting with the present review of foreign exchange trading.
Its focus — as recommended by the Productivity Commission — is vertical integration in the industry and its impact on competition barriers.
That more than anything will help improve the industry’s ability to direct its focus in the right way, which means customers.
The game now is to talk up the difficult path ahead to reform the industry’s culture.
The test will come when that talk gives way to action that is sustainable.
Watchdogs at war
Graeme Samuel did his articles sharing a small room with Kenneth Hayne at the long forgotten Melbourne law firm Grant & Co back around 1968, so it is fitting that Treasurer Josh Frydenberg tapped Samuel to crack the whip over APRA in the coming external review (first promised three years ago).
What was less fitting, in fact frankly plain dumb, of Frydenberg was to reappoint APRA boss Wayne Byres last November when his term didn’t expire until June this year.
Samuel worked on the CBA culture review under Byres’ predecessor John Laker.
That review concluded the bank had massive governance, cultural and remuneration shortfalls, which of course Hayne found throughout the entire industry.
This of course made it interesting for Laker to review CBA — when he was the guy who had been supervising the bank in his old day job.
ASIC’s operational performance was no better than APRA but it had the benefit of a new smooth-talking chair in James Shipton, who was smart enough to say mea culpa and to institute the Daniel Crennan review of ASIC’s enforcement unit in time for the final report.
Guess which regulator emerged with more powers under Hayne?
Kenneth Hayne has quietly ended one of the great feuds of the superannuation industry by recommending and gaining bipartisan support to create single default funds.
The government has accepted the call and, while not singling it out, opposition Treasury spokesman Chris Bowen has implicitly supported it by committing the opposition to implementing all of the royal commissioner’s recommendations.
The battle now will be how the recommendation is implemented.
Default funds account for about 25 per cent of all funds and 20 per cent of new funds.
The Productivity Commission recommended making your first default super account the lifetime option until you choose another fund.
The industry funds’ preferred model is for your super to follow you, so, if you default into Australian Super and then become a builders labourer you would join Cbus but the Australian Super money would follow you.
Multiple default funds created when people changed jobs are one of the great money wasters of the present super system and Hayne says it this can be avoided by making your first default as the lifetime fund.
The Productivity Commission has said multiple defaults cost $1.5 billion a year.
The reality is the big industry funds are now ruling the market so they can stand on their own two feet. Australian Super has more than $145bn under management and is the biggest in the market.
The default system has created controversy because it linked superannuation to industry awards but the Productivity Commission wants this broken by having a selection of funds employees can choose from.
While Australian Super has cut its management expense ratio from 84 to 66 basis points over the last decade, last week it unveiled a service fee hike from $1.50 to $2.25.
The retail funds used to also benefit, because if a bank lent company money it was expected to use its superannuation fund for its workers. That system also made no sense.
Hayne didn’t have to venture so far into superannuation but in doing so he has ensured that much of the Productivity Commission’s recommendations are now being implemented with a couple of big ones, like the best-in-show model, yet to be decided.
Hayne has followed the Treasury model by also recommending that mortgage brokers sell to consumers and not be paid by the banks.
The Productivity Commission figured that would rob the market of competition and Treasurer Frydenberg has agreed. Banning trailing commissions is, however, a step in the right direction
By John Durie (John Durie is the paper's senior business commentator. He has been a business reporter for 35 years, starting his career in the Canberra Press Gallery in 1980. John worked for 13 years as Chanticleer Columnist for the AFR, four years as business columnist for the New York Post, and also worked in Paris. John won the 2013 News Business Journalist of the Year Award.)
6 February 2019