The Banking Royal Commission has been a great success. The Commission created the appropriate theatrics and drama to ensure that its recommendations are almost certain to be implemented. The actual recommendations mainly followed those suggested by the Productivity Commission overlain with some additional strategic legal advice offered to ASIC, and so are sensible, practical and pragmatic.
The interim report had made clear the Commissioner’s view that there were already plenty of laws and regulation governing finance. Accordingly its recommendations do not create new bodies of law and layers of regulation. It focused on three things:
- ensuring people and institutions obey the law
- eliminating unnecessary carve-outs which complicate what firms and regulators do
- establishing clear principles that advice businesses must serve the client interest only.
The fact that the bank share prices rose after the report was announced does not mean that they got out easily, rather that it might have been worse for them, so there was a relief rally. The CBA for example will have paid over $2 billion in fines and remediation, and is now spending about $600 million per year on IT to address compliance issues. It also replaced its Chairman, CEO and most of the senior executive team. It is also possible that some of the senior staff might go to jail.
Compliance with the law is fundamental to our economic and cultural norms. The fact that a number of entities did not understand that they were breaking the law, or did not think they were important breaches, emerged as a significant issue. Changing organisational cultures, increasing the risk of discovery, and increasing the penalties for breaking the law formed the basis of many of the recommendations of the Commission. It also offered some legal advice to ASIC about how to tackle some of the issues.
One of the important points it made was that the use of the courts has three functions. First the direct impact on the presumed wrong-doer, next a deterrent effect on other potential miscreants, and finally an informational effect – establishing clarity about what is not permissible. The Commission encouraged the regulators to use the courts more, especially to achieve clarity around the informational aspect of law.
With complicated laws and lots of carve-outs, it is difficult for large corporations to ensure all employees are making the right decisions. The task of translating the law into business practices, and embedding those within large organisations, will be a significant challenge for all financial institutions. Nevertheless the credit laws and the advice laws make this essential.
This becomes easier if the law is simpler, with fewer exemptions and carve-outs. The recommendation that car dealers not be exempt from the credit laws is one example, but there were many others.
The third major thrust was to clarify that brokers, trustees etc had to serve the interests of the client, and the clients had to pay for the service. At a blow this removes all problems of conflicted remuneration.
Superannuation trustees must act only in the interests of the people for whom they hold the money in trust, mortgage brokers must act solely for the purchaser of the mortgage. The principle is that advisers must not benefit from the particular decisions taken as a result of their advice.
This set of recommendations might also resolve some of the acrimonious arguments about the composition of trustees for superannuation funds. It should not matter whether trustees are appointed by unions, or are independent, they all have the same responsibility to represent the interests of the people whose money they are responsible for, and no one else; not the union and not the employer.
The Australian banks are amongst the best in the world, the Australian superannuation system is too, and the Australian regulators are highly regarded internationally. There is no real case for gutting the sector and redesigning everything.
The Royal Commission has established a number of principles which need to be entrenched, and largely followed the practical work done by the Productivity Commission. Both groups should be congratulated.