The report is in, bank shares have rallied and we could almost hear the collective sigh of relief from bank boards, executives and investors. While Commissioner Kenneth Hayne has handed down an impressive document, it is essentially an exercise in tinkering and, even if implemented and enforced by a suddenly lively force of regulators, would not be enough to fix the fundamental flaws in Australia’s banking culture, writes Kim Wingerei in his two-part analysis of the Commission’s final report.

CLAUDIO RANIERI is a successful Italian football manager whose nickname is “tinker-man”. He is known to tinker a lot with lineups, tactics and player formations, sometimes to good effect, but not always. Kenneth Hayne – who presided over the Banking Royal Commission – has never coached football as far as I know, but he too knows how to tinker!

That said, the Commission’s final report is an impressive document. Although as Hayne alludes with the obtuse eloquence unique to his profession, its work could have benefited from more time. He does, however, make the point that finding solutions to the many issues raised are critical and urgent.

The report – excluding the case studies and appendixes – is a 500 page read. Mortgage broker, Rob McFadden, was very quick to read it. Within a day of publication. his petition to “Save the Mortgage Broking Industry” was up on Change.org. If all the 76 recommendations of Hayne’s report are enacted in legislation, mortgage brokers are indeed up for some changes.

Much of the report does focus on the retail end of banking and finance, an inevitable result of the focus of the more than 10,000 submissions made to the commission of which 61 per cent were banking related complaints.

Even without delving into the case studies, the report is dire reading about an industry which in Hayne’s own words – echoing Gordon Gekko – is driven by greed:

“ – the pursuit of short term profit at the expense of basic standards of honesty.“

Coming from a man that has spent his entire adult life within the carefully confined words of the justice system, that is an explosive statement. But although mortgage brokers may differ on this point, the majority of recommendations are more practical than combustible.

Many are just plain common sense. Some examples:

The borrower, not the lender, should pay the mortgage broker. As a logical consequence, trailing commissions paid to the brokers by the lender must also be abolished – this is a fundamental recommendation on remuneration in general and echoed elsewhere. (Recommendation 1.3 et al.)

Mortgage brokers should be considered financial advisers and subject to the same laws and regulations. Why this hasn’t happened already is a legacy of the lackadaisical implementation of the recommendation of the Murray Inquiry (2014) — no doubt under pressure from industry lobbyists. (Recommendation 1.5)

Financial advisers who are not independent must explicitly declare this to clients. To quote Homer Simpson: “Doh!” (Recommendation 2.2)

No “hawking” of superannuation and insurance products — i.e. no unsolicited cold calling. When implemented, would it not be wonderful to see it become practice across all industries — “boiler room” style selling is a mere annoyance to most but hurts the vulnerable a lot! (Recommendations 3.4 and 4.1)

All superannuation account holders should have a default account: “…machinery should be developed for ‘stapling’ a person to a single default account.” Can’t help but wonder why none of Hayne’s younger colleagues told him that we call them computer systems now. (Recommendation 3.5)

Handling and settlement of insurance claims to be considered as a financial service and regulated accordingly. This is a simple and sensible recommendation with positive implications for consumers but will be a challenge for insurance companies. (Recommendation 4.8)

A common thread throughout the report is to make financial advisers accountable to their customers, and only to their customers; and to enforce transparency and improve product disclosure.

It surprised me that there was almost no mention made of the unnecessary complexity of many financial products and the role this plays in failing to match customers with suitable products they can be expected to understand.

Much of the coverage of the Commission hearings centred around the conduct of the banks and other financial institutions, not just at point-of-sale, but in loan application processing, complaints handling and remediation. A lot of publicity was given to the practice of charging people – dead or alive – for services not rendered. Some of the recommendations are implicitly addressing this, and it is perhaps the most damning reflection of attitudes prevalent in the industry.

In addition to improved customer protections, the report deals at length with remuneration practices which underpins those attitudes. It calls for sweeping changes to force remuneration of front-line staff to no longer be based solely on sales performance but more on customer service and compliance measures.

Perhaps as an indication of the time pressure Hayne and his people were under, they refer to the ‘“Sedgwick Report” as the model for changes to remuneration practices, recommending that it be implemented “both in letter and in spirit“. The Sedgwick report was commissioned by the Australian Banking Association (ABA) – an orange flag of caution as to its intended value to customers – and completed in 2017. Most of the banks have committed to its implementation, at least in words, if not yet in deed.

The Sedgwick report also deals with third party remuneration — in particular mortgage brokers and although it recommends removal of volume and campaign based incentive payments, it is ambiguous on trailing commissions in contrast to Hayne’s recommendations. Maybe even a red flag, then.

The Sedgwick report does not deal with executive remuneration. The Royal Commission does, but only in an aspirational manner. There is much wordage around changing executive pay to better reflect compliance measures, accountability and culture but no reference to the notion that bank executives are paid well beyond what the general community feel is reasonable.

The real dichotomy here is that the rationale commonly used by bank executives for their enormous pay packets is the risk they take in their high profile jobs. In reality they are effectively shielded from any down-side risk and handsomely rewarded for the up-side, and the bar is typically set low.

One of the more telling episodes of the Commission’s hearings that involved bank executives is where CBA’s Chief Risk Officer advised the board that there were no reason to reduce executive remuneration on account of increased risk of loss. This despite the uncovering of the now well documented money-laundering compliance failures and other major risk issues reported to the board.

CBA Board Chairperson’s testimony here is perhaps the most telling of all. Catherine Livingstone virtually admitted to turning a blind eye, stating that the reports were “patently inadequate”, yet further enquiries were not made by the board. (CBA ended up with a $700 million fine, if that’s not a risk worth mentioning, what is?)

Even more galling than Livingstone’s testimony was (soon to be former) NAB chairman Ken Henry — arrogant and devoid of contrition he symbolised how the big banks appear as a law unto themselves; impervious to the fact that the money they make for is to a large degree a result of a cosy regulatory regime and a virtual monopoly on the deposits and mortgages of ordinary Australians that they too often treat with contempt.

.@NAB Chairman Ken Henry joined @leighsales #abc730 just hours after it was announced that he and Andrew Thorburn would resign. Watch the full interview here. #auspol #bankingrc pic.twitter.com/0zvlfUMwgq — abc730 (@abc730) February 7, 2019

Hayne does indeed recognise the deep rooted cultural problems that beset the industry. But here, too, the recommendations are more aspirational than specific. It is a problem endemic to the finance industry, generally acknowledged as one of the enablers of the GFC. Since then, hundreds of millions of dollars have been spent around the world on cultural reviews — largely window dressing exercises primarily benefiting the consultancies that conducted them.

Hayne’s recommendations suggests another bonanza for these companies in the form of mandatory cultural and governance assessment programs. APRA will be given additional tasks to ensure that “cultural change programs” are implemented (Recommendation 5.7).

APRA comes out of the Royal Commission without serious blemish. Hayne is a lot less enamoured with ASIC and in particular how it is works too closely with the companies it regulates.

The report contains many examples of where “Enforceable Undertakings” (EU) are used by ASIC in lieu of litigation, even in instances where companies (and directors) have been found in clear – and sometimes criminal – breach of their duties. Hayne makes the point that ASIC and other regulators often does not differentiate between administrative errors and negligence – wilful or otherwise.

The Commission has referred a number of cases for potential criminal prosecution, a move welcomed by many of the most vocal critics of the finance industry. The only thing we know about these cases, though, is that the law works at a snail’s pace and white collar convictions are as rare as the payments to lawyers are bountiful.

There is no mention of other consequences for misbehaviour — such as demanding that executives found to misbehave are reprimanded, demoted or sacked.

Accountability remains the real elephant in the report. Despite having its very own Banking Executive Accountability Regime (BEAR – sic!), the lack of accountability for errors, omissions and malpractice is at the very core of why we had to have this commission in the first place.

As the report proves, there are lots of room for improvements in transparency, remuneration practices, compliance and in the regulatory regimes, but the root cause remains – as Hayne said – greed.

For all its virtues and good intentions, the inadequacies of the report were laid bare within minutes of its publication as bank shares rallied — proof positive that bank boards, executives and investors breathed a sigh of relief knowing that the more things change, the more they’ll stay the same.

The opportunity missed is that the fundamental flaws in our finance system are not being addressed. Hayne has recommended many sensible changes to the rules. But where Claudio Ranieri would insist that his proteges play the man and not the ball, Hayne is still mainly playing the ball when the real changes required means not just rule changes and maybe new referees, but a whole new kind of squad.

And redesigning the ball-park.

To be continued.

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Kim Wingerei is a businessman turned writer and commentator. He is passionate about free speech, human rights, democracy and the politics of change. Originally from Norway, Kim has lived in Australia for 30 years. Author of ‘Why Democracy is Broken – A Blueprint for Change’.

You can follow Kim’s blog or on Twitter @kwingerei.