Ninety-nine questions that need answers

Ninety-nine questions. That’s what Kenneth Hayne, the man heading the royal commission into the banking and financial sectors, has posed in his interim report.

Ninety-nine questions that go to the heart of the way we use our banks, get insurance, make investments and plan for our retirement.

And they are the 99 questions that will clearly shape both the recommendations that Commissioner Hayne will deliver to the Federal Government early next year and perhaps the response of Scott Morrison and Bill Shorten.

The Hayne inquiry follows a long line of investigations into the financial sector over the past 20 years.

The most important of those was the Wallis inquiry of 1996, the HIH royal commission that reported in 2003 and the Murray Financial Services Inquiry that was ordered by Joe Hockey.

Looking back at those three inquiries it’s clear they put too much faith in our bankers and regulators while at the same time not focusing enough on consumers.

And their warnings, when they were issued, were ignored.

For instance, the royal commission into the collapse of insurer HIH produced 61 recommendations back in 2003.

This was recommendation 26.

“APRA (should) develop a more sceptical, questioning and, where necessary, aggressive approach to its prudential supervision of general insurers,” it recommended.

“Consultation, inquiry and constructive dialogue should be balanced by firmness in its requirements and a preparedness to enforce compliance with applicable standards. In particular, APRA should take a firm approach to ensuring regulated entities’ timely compliance in the lodging of returns and the provision of information.”

Fifteen years later and this is what Hayne had to say about APRA and fellow regulator ASIC. “When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done,” he found.

“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court.”

We don’t even have to go that far back in time.

The Financial Services Inquiry, headed by former Commonwealth Bank boss David Murray, appears to have asked the wrong questions.

There was concern at the time about his inquiry, that it would hurt the banking sector.

Instead, Murray gave it a clean bill of health while arguing more competition and less regulation would help the sector in its role of funding the national economy.

It argued that fairness was important to the financial system. “Fair treatment occurs where participants act with integrity, honesty, transparency and non-discrimination. A market economy operates more effectively where participants enter into transactions with confidence they will be treated fairly,” it reported.

Murray did find the current regulatory system in the financial system was “not sufficient to deliver fair treatment to consumers”.

However, its argument was that there were “shortcomings” when it came to disclosures and financial advice which “means some consumers are sold financial products that are not suited to their needs and circumstances”.

Sorry, we’re two-thirds of the way through a royal commission that believes greed is at the heart of some terrible decisions and actions.

Take fees from dead people? Hand over loans to people who have no idea what they’ve signed up for? Fees for no services? Trailing commissions that eat into savings? Fees effectively hidden so people did not know they were being fleeced? That’s more than a shortcoming. And that doesn’t get to the issues in ASIC and APRA.

APRA and ASIC are both creatures of the Wallis inquiry which started in mid-1996 to look at how better to regulate the financial sector. Much of the focus was on reducing costs, with complaints the financial sector was costing more to run than the construction industry.

Yet head into royal commission hearings on superannuation and you find rather than reduce costs, the for-profit sector in particular was keen to transfer costs to consumers or hide them while boosting the revenue base of the banks.

A common theme through Wallis, through the HIH inquiry and then the Murray inquiry is the absence of the customer.

The mums and dads and builders and nurses who actually depend on the banking sector for their day-to-day needs were put to the side.

They’re the ones who have been ripped off, fleeced and generally done over by a system that is effectively protected by the government of the day.

More important in the three previous reports was efficiency (Wallis), technical repair (HIH) and economic stability (Murray). So where does this leave Hayne?

Those 99 questions suggest he could go one of two ways. Big change or incremental.

Big change means stripping powers from APRA and ASIC and transferring them to the Australian Competition and Consumer Commission with a remit to go hard against those found to be ripping off consumers.

For instance, an organisation found to have taken fees for no service could actually find themselves in breach of criminal law such as theft.

Stripping the power of the banks to offer MySuper products, leaving it to the non-profit sector, could also be on the radar for Hayne.

An overhaul of remuneration practices, maybe even beyond the banking sector, cannot be discounted.

For instance, the commissioner highlighted the danger of junior or frontline staff getting bonus payments for signing customers up to new products.

“If more junior employees should not be remunerated in this way, why should their managers and senior executives,” Hayne asked.

In the wake of the GFC, Wall Street firms successfully argued that restraints on bonuses would prevent banks and financial firms from competing for the best staff.

The royal commission’s findings are likely to prevent that sort of argument gaining any traction in Australia.

In the agricultural field, Hayne wondered out loud whether farmers in drought-affected areas should be charged default interest if they fall behind on their repayments.

Given natural disaster of one form or another is the default position of farming in this country, such a proposal would greatly swing benefits to farmers.

But might that mean banks restrict their lending to the farming sector?

Incremental proposals, which might be welcomed by the financial sector, appear unlikely given the way Hayne went to the heart of so many problems in his interim report.

That would leave Morrison or Shorten, whomever is PM after the royal commission, facing some tough questions over how to deal with the recommendations set to flow.

All will hinge on how Hayne answers the 99 questions he has posed himself.