For the past six months, Kenneth Hayne has been sifting through a slew of misconduct, poor behaviour and regulatory inaction. This is the detail of his initial take on what he has uncovered.

Key takeaways: Kenneth Hayne traced consumer lending misconduct to the "pursuit of profit"

Kenneth Hayne traced consumer lending misconduct to the "pursuit of profit" The commissioner said greed is the root cause of bad behaviour in financial advice

The commissioner said greed is the root cause of bad behaviour in financial advice Small business lending looks unlikely to be hit with further legal restrictions

Small business lending looks unlikely to be hit with further legal restrictions Commissioner Hayne acknowledged "profound personal effects" on farmers

Commissioner Hayne acknowledged "profound personal effects" on farmers Funeral insurers slammed for targeting Indigenous customers, low value products

Lenders 'preferring pursuit of profit' to all else

Consumer lending is the vast majority of the banks' business, with home lending the bulk of that — a whopping $1.6 trillion at the end of last year.

In that context, several key questions raised by Kenneth Hayne in his interim report pose an existential threat to bank profitability.

One of those is whether the major banks, and probably most smaller lenders, have been routinely breaching responsible lending laws when they approve home loans — plus credit cards and car loans too.

"The evidence showed that, more often than not, each of ANZ, CBA, NAB and Westpac took some steps to verify the income of an applicant for a home loan," the report observed.

"But the evidence also showed that much more often than not none of them took any step to verify the applicant's outgoings."

Most concerning for the major banks, which have significantly tightened their home loan assessment procedures under the weight of Kenneth Hayne's gaze, is that the commissioner is asking whether even these tougher processes still fail to satisfy the law.

If the commissioner finds that they are still in breach, the banks will have to tighten access to credit even further, lowering their profits and potentially further strangling already declining housing markets.

The banks will also stand exposed to potentially billions of dollars in regulatory and consumer lawsuits, especially if thousands of those home loans start going bad.

Westpac has already agreed to a $35 million penalty to settle a responsible lending case with ASIC, but Commissioner Hayne's report hints at far more to come.

The other big threat is to the mortgage broking industry, with Kenneth Hayne questioning who brokers really work for, given they are paid by the lenders whose loans they sell.

In the best case for brokers, they may simply need to be more upfront with their customers about who butters their bread. In the worst case, the commissions they rely on could be banned or restricted.

As for motivation, the commissioner was no less scathing of bank behaviour in lending than he was of the misconduct in other areas of financial services.

"Much if not all of the conduct identified in the first round of hearings can be traced to entities preferring pursuit of profit to pursuit of any other purpose," he observed.

"Compliance appeared to have been relegated to a cost of doing business.

"And, the case studies undertaken in the first round of hearings showed, that there had been occasions when profit has been allowed to trump compliance with the law, and many more occasions where profit trumped doing the right thing by customers."

Commissioner Hayne also offered a useful translation of bank jargon for customers' benefit.

"A 'conversation' with a customer is treated as an opportunity to sell what the entity has to sell and, for that purpose, to gather some necessary information about the customer," he observed.

"The customer's 'needs' are formed by reference to what the entity has to sell. And often it is the entity's representative that tells the customer what he or she 'needs'."

Financial advice 'ignores basic standards of honesty'

Kenneth Hayne has described the financial advice industry as one riddled with dishonesty and greed.

"Giving advice that does not serve the client's interest, but profits the adviser, is equally dishonest," he said in the report.

"No matter whether the motive is called 'greed', 'avarice' or 'pursuit of profit', the conduct ignores basic standards of honesty.

"Its prevalence and persistence require consideration of the issues of culture, regulation and structure."

At the heart of the financial planning industry's bad behaviour is conflicted remuneration, and the commissioner has a blunt view.

"Sales staff can be rewarded by commission; advisers should not be."

The hundreds of millions of dollars charged in 'fees for no service' was a central part of the evidence heard over the past six months, and Commissioner Hayne pulled no punches in his assessment.

"The root cause for what happened was greed — the greed of both licensees and advisers."

The commissioner highlighted the inaction of the corporate regulator ASIC in reining in the bad behaviour.

He also lambasted the financial planning organisations — the Financial Planning Association and the Association of Financial Advisers — saying "neither plays any significant role in maintaining or enforcing proper standards of conduct by financial advisers".

The Future of Financial Advice (FOFA) reforms introduced by Labor came under scrutiny for their failure to outlaw many conflicted forms of payment.

For example, grandfathered trailing commissions remain under FOFA.

"How can these provisions be justified today?" the commissioner asked.

The commissioner has blown a hole in the excuse often used by senior bank executives and others — that bad behaviour is "just a few rotten apples".

"Preventing improper conduct (and promoting desirable conduct) is a central task of management, at every level in an entity: from the most junior supervisor to the most senior executives and the board."

'Reluctance' for changes to small business lending laws

Aspiring entrepreneurs and the small business sector may be breathing a sigh of relief, with the interim report suggesting the commissioner is not considering a slew of new lending restrictions, which some feared would make credit harder to come by.

The commission's hearings on lending to small businesses revealed stories of shattered dreams and the deep personal costs borne by business owners when things take a turn for the worse.

Small businesses are not currently covered by the responsible lending protections of the National Consumer Credit Act.

In the interim report, Kenneth Hayne likened small businesses to consumers in several ways, including their lack of bargaining power and resources, and their relatively unsophisticated financial dealings and understanding.

"Borrowers came to recognise, both during the life of the loan and later, that the lender had what they saw as 'all the power' and they had none," he said.

"Borrowers did not understand, and were not told, why the lender took the steps that it did when bringing the loan to an end."

A tension at the heart of small business lending is business owners' desire for access to credit, which requires the banks to take a risk, and the consequences for both the banks and business owners when that risk does not pay off.

The commissioner acknowledged the concern that extending the protections afforded to consumers to small businesses could lead to less availability of credit and increased costs.

"There has been reluctance, therefore, not least on the part of small business owners themselves, to take up proposals for increased protections," he observed.

The current chief protection for small business borrowers is the Code of Banking Practice, which governs members of the voluntary industry group, the Australian Banking Association.

Under the code, members are required to exercise the care and skill of a diligent and prudent banker when lending to consumer and businesses.

Commissioner Hayne concluded that a borrower defaulting on their loan does not necessarily mean, on its own, that the banker failed to comply with that duty.

"When a loan is provided to allow the borrower to start a new enterprise, there will always be a risk that the business does not prosper and that the borrower may default," he noted in the report.

Third party guarantors were described as playing a "central and perhaps irreplaceable role" in securing funding.

The Commissioner asked whether lenders should provide potential guarantors with more information about the loan and the new business.

Answers 'seldom clear cut' when turfing farmers from their land

There is no single or simple answer for the problems in agricultural lending highlighted in submissions to the banking royal commission, according to the interim report.

A question at the centre of the submissions made by farmers is how borrowers and lenders in the sector deal with the consequences of unforeseen events beyond their control.

"The answer that should be given in a particular case will seldom if ever be clear cut and obvious. Nice questions of judgment will be required," Commissioner Hayne said in the report.

"The criticisms that can rightly be levelled at banks in their dealings with agricultural lending much more often than not find their roots in the bank's failure to take all of the relevant considerations into account when deciding, in a particular case, whether to lend or what to do when the loan becomes distressed."

The commissioner acknowledged the "profound personal effects" on farmers when external events, including extreme weather, affect their profitability and ability to service their debts.

He raised questions of how properties and agribusinesses are valued and what should be done when valuations change, and whether default interest — higher interest charges that can add to the burden on borrowers in times of financial distress — should be charged to customers in drought-declared areas.

A central concern for many farmers who have lost their properties is the role of receivers and other external administrators, something not within the direct scope of the commission.

However, Commissioner Hayne noted the role of the banks in appointing receivers and asked whether it should be a last resort.

'Basic transactions made bewildering' for Indigenous customers

The interim report has pondered a crackdown on predatory funeral insurers targeting Aboriginal and Torres Strait Islander communities, and whether banks could do more to improve access to their services in remote areas.

The royal commission travelled to Darwin to hear of the hurdles some Indigenous Australians are forced to jump when dealing with financial services.

In the report, Commissioner Hayne said Indigenous customers in remote communities face problems with access to basic accounts, informal overdrafts, dishonour fees and identification issues.

"The prevailing theme in the evidence was of basic transactions made bewildering by inadequate recognition on the part of the bank of an Indigenous customer's circumstances," he said.

The commissioner questioned how and when the banks should use discretion when charging overdraft and dishonour fees, which while small, can add up to significant amounts over time.

Aboriginal and Torres Strait Islander people in remote communities may have limited access to conventional identification or inconsistencies across their documents, leading to difficulties in dealing with banks and super funds.

Financial intelligence agency AUSTRAC already has guidelines to overcome this hurdle, but the Commissioner questioned whether they were being implemented on the frontline.

Funeral insurers were singled out by the commissioner for "predatory behaviour" and their products were slammed as being of little value to consumers.

The commissioner asked whether funeral insurance was the type of product ASIC should target when it is given product intervention powers under legislation currently before parliament.

The Darwin hearings revealed the extent of inappropriate selling by funeral insurers.

The Aboriginal Community Benefit Fund — a non-Indigenous organisation — had nearly two-thirds of policyholders aged under 30, with around a third under 18.

"Should it be unlawful to sell funeral insurance for persons under 18 years?" Commissioner Hayne asked in the report.

Fels calls for ASIC to be stripped of banking oversight

Former Australian Consumer Commission chairman Allan Fels says ASIC and Australia's banks cannot be relied on to regulate themselves, given the regulator's close relationship with the banking sector.

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He has called for the ACCC to become involved in the regulation of banks, given ASIC's poor track record of prosecuting misconduct.

"[ASIC] had a culture which is not conducive to taking big offenders to court and only takes small offenders to court, and with big offenders, they tend to reach somewhat friendly agreements that they shouldn't do this kind of thing again," Professor Fels said.

"I certainly think the ACCC needs to be brought into the field — whether it takes it over or is available as a kind of backup law enforcer, either way, they're needed."