The report covers the “policy-related issues” arising from the first four rounds of public hearings, which covered consumer lending, financial advice, SME loans and the experiences of regional and remote communities with financial services entities.
According to Commissioner Kenneth Hayne, “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”.
The report reads: “As commercial enterprises, each of the entities whose conduct was considered in the first round of hearings rightly pursues profit. Directors and other officers of the entities owe duties to shareholders to do that. But the duty to pursue profit is one that has a significant temporal dimension. The duty is to pursue the long-term advantage of the enterprise. Pursuit of long-term advantage (as distinct from short-term gain) entails preserving and enhancing the reputation of the enterprise as engaging in the activities it pursues efficiently, honestly and fairly. And, lest there be any doubt, it also entails obeying the law.
“But to preserve and enhance a reputation for engaging in the enterprise’s activities efficiently, honestly and fairly, the enterprise must do more than not break the law. It must seek to do ‘the right thing’.”
“Compliance appeared to have been relegated to a cost of doing business”
“The evidence that was led in the first round of hearings suggested that the entities examined had done, and were doing, as little as they thought they have needed to do to meet their legal obligations, offering no (or at best, next to no) encouragement to or reward for staff or third parties to pursue the interests of the consumer. 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.”
The interim report continues: “The importance that entities give to profit is reflected most clearly in their remuneration policies for staff and for third parties such as brokers, introducers and aggregators.
“Those policies have two kinds of effect. First, staff and others engaged by an entity will treat as important what they believe that the entity values. Rewarding volume and amount of sales is the clearest signal that selling is what the entity values. What staff and others believe that the entity values informs what they do. It is a critical element in forming the culture of the entity.
“Second, the importance that entities give to profit is shown also by their allowing third parties whom they authorise to deal with consumers to prefer the interests of the third parties to those of the consumer.
“Remuneration and similar arrangements (most notably the ‘flex commission’ arrangements in relation to car loans, which are considered later) have encouraged those third parties to pursue their own profit interests (and thus the profit of the entity) at the expense of the consumers’ interests.”
The 375-page report acknowledges that the industry has been moving to remove volume-based commissions for brokers, but noted that upfront and trail commissions based on loan value remain.
“While basing those commissions on funds drawn down removes an incentive for brokers procuring a loan larger than the borrower will use, the change does not deal with the more basic problem of borrowers being encouraged to borrow more than they need.”
It added: “Value-based remuneration conflicts directly with customers’ interests.”
However, the commission has also said that bank remuneration and incentives in that arena should also be looked at more closely, stating: “What does require closer consideration, however, is the proposition... that the way in which bank staff are paid does not lead to poor customer outcomes.”
Public consultation on interim report
The public is invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which covers the first four rounds of hearings.
Members of the public will be allowed to make online submissions to the commission about past conduct until 5pm today (28 September), after which time the commission is expected to “shift its attention from past experiences to proposals on what should be done in response to the issues raised or conduct uncovered within the banking, superannuation and financial services industry”.
The commission will release a final report, which will include the topics of the fifth, sixth and seventh rounds of hearings (focusing on superannuation, insurance and “policy questions arising from the first six rounds”, respectively) by 1 February 2019.
The seventh round of hearings, which focuses on policy questions arising from the first six rounds, is scheduled to begin in Sydney on 19 November and will then move to Melbourne from 25 November.
Details about topics and case studies to be heard will be published prior to the hearings commencing.
[Related: Banks issue responses to RC allegations]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.