Financial Services Royal Commission – where to after the federal election

Prior to the federal election held on 18 May 2019, there was frenetic discussion and debate over the 76 recommendations made by Commissioner Hayne AC QC in his final report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Service Industry.

Both major political parties promised reform, however, the extent of industry change was largely to be dictated by the outcome of the election.

With the return of the Liberal Party to office, the promised roadmap for change should be clear.

Before the election, the Federal Government announced that it would act on all 76 recommendations made by Commissioner Hayne AC QC. Careful lobbying by industry groups resulted in swift policy change on how recommendation 1.3 – the “user pays” broker model system – will be implemented with the issue to be reviewed in three years’ time.

Conversely, there is divided opinion on how the proposed changes to the mortgage broker industry will impact the Australian economy in the long term.

Publications by the Mortgage & Finance Association of Australia suggest the disruption will limit competition, increase cost of funds and reduce available credit. Concerns regarding a restriction in competition have also been raised by the Productivity Commission and the Governor of the Reserve Bank of Australia.

Given more than 50% of consumer loans in recent years have been originated by a broker, any change to this sector will continue be a focus for economic policy for the Australian Government. It will also be an area of keen interest for most Australians, with the majority having an interest in shares in the Big Four banks through their superannuation fund.

Other recommendations made by Commissioner Hayne AC QC in relation to the banking industry may cause less disruption and have garnered less media attention with the support of most major industry and political groups. These include:

• The introduction of a “Best Interest Duty” for mortgage brokers, which, if breached, will carry a civil penalty.
•  Approval of industry codes by ASIC and enforcement as a breach of statute.
• Banks will no longer be able to allow informal overdrafts on basic accounts without a customer’s prior agreement and will be unable to charge dishonour fees on those accounts.
• A removal of the exemption for “point of sale” lenders (e.g. auto dealer finance) from the National Consumer Credit Protection Act 2009 (Cth).
• An expansion of the definition of small business in the Code of Banking Practice to include any business with fewer than 100 full-time equivalent employees if the loan applied for is less than $5 million (notably this change is opposed by the Australian Banking Association).
• The creation of a national scheme for farm debt mediation.
• A restriction on Banks charging default interest on loans when land is affected by natural disaster.
• Ensuring staff managing distressed farm loans have appropriate experience in agricultural lending.
• Industry codes being enforceable as law, with reference to the existing Australian Consumer Law as a framework.

Of particular interest is the implementation of the recommendation for industry codes to be enforceable as law and which of the existing clauses in the Code of Banking Practice will be designated as enforceable code provisions. How the legislature will implement this recommendation in practice may have a significant impact on market participants moving forward.

Overall the recommendations made by Commissioner Hayne AC QC seek to simplify the law so that its intent is met, remove conflicts of interest, improve the effectiveness of regulators, drive cultural change, increase consumer protection and provide for compensation where standards or expectations are not met.

In the short term, we expect to see further litigation and complaints made against banking and financial institutions for past conduct, and an increase in regulatory enforcement action (provided there is also an increase in government funding).

We also anticipate there will be greater scrutiny and oversight of the implementation of consumer protection legislation and voluntary codes. One example of this is the Banking Code Compliance Monitoring Committee own inquiry into Banks compliance with clause 31 of the 2013 Code of Banking Practice.

Suffice to say, it is no longer enough to merely say that you comply with your legal and contractual obligations and it is now necessary to demonstrate how you achieve the purpose and goals of the relevant legislation and voluntary codes.

Key takeaway

Implementation of the 76 recommendations made by Commissioner Hayne AC QC has the potential for long lasting and far reaching change, not just for the banking industry. We expect continued coverage and lobbying of the key recommended changes from industry groups and within economic forums and committees. Despite the extended media coverage, we still consider that this is an issue worth following as almost all Australians have a vested interest in the financial health and stability of the banking industry (either through shares held by their superannuation fund, their own financial commitments or benefits through employment).