Weighing up the policy responses to banking misconduct

Tuesday, May 14, 2019, 06:01 AM | Source: Pursuit

By Carsten Murawski, Andrew Godwin

Weighing up the policy responses to banking misconduct

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Following 68 days of public hearings, 134 witnesses and more than 10,000 public submissions, the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released in February made 76 recommendations to clean up the wide-ranging and shocking misconduct it uncovered.

So what are the major parties promising to do about it?

Treasurer Josh Freydenberg and the Opposition both initially committed to implementing all the Commission's recommendations. Picture: Getty Images

The Coalition & the ALP

Initially, both the Coalition government and the Australian Labor Party committed to implementing all the recommendations in full. However, neither party has presented any details of this implementation.

Recently, the Coalition government stepped back from implementing one of the key recommendations – a ban on trailing commissions for mortgage brokers. These are annual commissions levied over the life time of a mortgage and were bluntly described in the report as "money for nothing."

Instead, it announced that the current arrangements would remain in place for three years pending a review by the Australian Competition and Consumer Commission and the Council of Australian Financial Regulators.

On the other side of politics, the ALP's rhetoric is "you can't trust the Coalition to implement the recommendations of the Royal Commission", in line with its general message that the Coalition is for the "big end of town".

The ALP argues it will implement the recommendations of the Royal Commission faster and more comprehensively than the Coalition.

In its response to the Royal Commission, the ALP pledged to end conflicted remuneration in mortgage broking, but "in a manner that doesn't harm competition in the mortgage market". Again, no details have been offered about how this would be implemented in practice.

The ALP claim they will implement the Commission's recommendation faster than the Coalition. Picture: Getty Images

Both parties, Coalition and ALP, have committed to providing the financial regulators (the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority) with adequate resources to better enable them to perform their functions.

The Coalition government has moved forward in this regard by allocating more than $A550 million in additional funding to ASIC and APRA in the budget. This is a small, but important, step in strengthening the enforcement powers of the regulators, an area that was covered in detail by the Royal Commission in its Final Report.

The additional funding follows capability and enforcement reviews in respect of ASIC and coincides with similar reviews in respect of APRA.

The Greens & One Nation

The Greens have released a list of principles for banking and finance, some of which go beyond the recommendations of the Royal Commission Final Report in terms of calling for structural reforms.

Two examples reflect their emphasis on the social function of finance.

According to the Greens: "the government has a role to ensure that people have access to impartial financial advice tailored to their circumstances" and "all communities, including the most disadvantaged and remote, should have access to basic banking services on nationally comparable terms."

The implications for mortgage broking has been a focus of election policy responses. Picture: Getty Images

Further, the Greens say "publicly-owned financial institutions should form a key component of Australia's banking sector."

But like the two big parties, the Greens haven't explained how any of their suggestions would be implemented.

One Nation has announced that it supports mortgage brokers, not banks, arguing that there were several flaws in the Royal Commission's report relating to the home lending market and that the Royal Commissioner showed "little knowledge of how the mortgage market works."

The United Australia Party has been relatively quiet following the Final Report of the Royal Commission but has campaigned to make home loans tax deductible "to encourage home ownership and boost the construction industry."

The limited scope of the Commission

It is important to realise that the Royal Commission's remit wasn't as wide-ranging as it could have been. There are areas it didn't examine which are nevertheless important for any new government to consider.

In particular, the Commission didn't examine the underlying causes of misconduct, particularly the problem of incentives and the embedded "sales culture" within the banking sector. Nor did it consider the future challenges the sector will be facing.

Addressing both of those issues would require fundamental structural reforms.

Beyond policy responses to the Commission's recommendations, we need policies to ensure that our financial sector is future proofed. Picture: Shutterstock

Neither the Coalition government nor the Opposition has offered any details as to how they would approach such reforms.

In addition, neither party has issued any detailed policies addressing the looming financial challenges that households face, including high levels of household indebtedness, underinsurance and the inadequacy of retirement funding.

Neither are there policies to address how the financial system should be made more "future-proof", particularly in the face of technological transformation and disruption.

The sorts of reforms our multidisciplinary research teams are examining and that need to explored by the next government include:

  • measures to achieve a more consumer-centric (and less sales-centric) approach to the provision of financial services
  • a national "Fincare" system that gives all Australians free access to basic financial health checks, advice and guidance
  • a financial wellbeing agency to monitor, coordinate and guide action on financial wellbeing
  • the integration of financial literacy education in high school curricula across Australia

The future of the financial industry and making sure it is working for all Australians, is a critical issue.

But heading into election day, we could do with more details from all parties.

A version of this article also appears on Election Watch.

Banner: Getty Images