After gathering evidence and reviewing more than 10,000 submissions over the course of the last twelve months, retired High Court judge Kenneth Hayne on Monday declared the time has come to overhaul the Australian financial services sector.
In his scathing final royal commission report, Justice Hayne made 76 recommendations which he believes are necessary to clean up the finance, banking, superannuation and rural lending industries.
Some of the key recommendations include regulators are now on notice when it comes to enforcement and are urged to prosecute more often, conflicted remuneration is poised to come to an end with banks no longer able to reward brokers for providing them clients, and there will be a compensation scheme of last resort to be drafted by the government.
The report outlines shocking evidence of misconduct and greed in the Australian financial sector from some of the country’s biggest and supposedly most trusted banks at the expense of customers and businesses, with at least three financial institutions facing the possibility of criminal charges.
Despite there being calls for the royal commission since April 2016 which were at the time repeatedly rejected by the Turnbull government, Treasurer Josh Frydenberg promised there would be action taken on all 76 of Mr Hayne’s recommendations and admitted they had been ‘too timid’ when it came to dodgy banks.
“From today the banking sector must change and change forever,” said Mr Frydenberg.
Until the recommendations are implemented, what effect, if any, the report will have on property prices is yet to be seen. However, the findings reveal there are already clear winners and losers from the year-long investigation.
The general consensus since the report’s release is that the banks got let off the hook too easily for their past misdemeanours while mortgage brokers have unfairly been hung out to dry despite little evidence of widespread misconduct.
Acknowledging issues over compliance with responsible lending laws, Hayne dropped the hammer on mortgage brokers. His recommendations state mortgage brokers would now be paid by borrowers instead of the banks, would be legally required to act in their best interests, and should be regulated by the same laws that apply to financial advisors.
Despite Treasurer Frydenberg stating he planned to “proceed carefully and in stages” on the mortgage broking industry, Hayne’s recommendations of changes to mortgage broker pay over the next two to three years – first by banning trail commissions for new loans followed by banning other commissions – will no doubt be a hit to the industry.
Lending practices of Australia’s banks have also been in the spotlight since the royal commission began in March 2018, however there was no directive in Hayne’s report to further tighten lending, with the desired outcomes having already been met.
“I consider that the steps taken by banks to strengthen their home lending practices and to reduce their reliance on the HEM (Household Expenditure Measure) – are being taken with a view to improving compliance with the responsible lending provisions of the NCCP,” wrote Hayne.
Borrowers’ abilities to repay loans came into focus when the commission heard a large majority of loan applications to NAB and the Commonwealth Bank deliberately underreported living expenses even less than the modest HEM in order to boost their chances of getting approved.
Commonwealth Bank chief executive Matt Comyn said the bank was “doing a better job of discovering what a customer’s declared living expenses figure actually is.” If this results in a tightening of credit, according to Hayne, it is simply “the consequence of complying with the law.”
The recent crackdown on borrowers’ living expenses has seen banks forensically assess spending on things like UberEats, gambling and alcohol. While this is expected to continue, AMP Capital chief economist Shane Oliver says there is unlikely to be any further tightening.
“The royal commission has reinforced the lending standards APRA has already put through the system and that tightening started back in 2017 and gathered pace into the early part of last year,” said Mr Oliver.
“The anecdotes of it being harder to get a loan, that was happening around March, so the tightening and the negative impact on the property market because of credit tightening has already been evident and there aren’t recommendations to push that further.”
With nationwide property prices having been on a downward trajectory for a year and a half having fallen 10 per cent in Sydney and more than 8 per cent in Melbourne since the royal commission began, Oliver believes the effects won’t last forever.
“The effect of the royal commission on property will last for years but not forever,” he said. “You go through periods where lending standards become lax and then there’s some sort of blow up.”
“There will come a point down the track where it’s concluded maybe the tighter lending has all gone too far, however I don’t think we will quickly return to an investor-driven boom,” Oliver said.