Pearls and Irritations

Here comes the first of Kenneth Hayne’s large hobnailed boots up the backside of Australian banking, superannuation, financial advice, wealth management, insurance and regulation. It’s not going to be pretty, but it’s certainly going to be riveting. Most obviously the Big End of Town’s CEOs and chairmen were mostly spared embarrassing questioning about what they knew.what they should have known and their general competence

After resisting a banking royal commission so hard for so long, it seems the government will release Mr Hayne’s interim report as soon as it’s delivered on Friday. Having swapped sides, Prime Minister Morrison and Treasurer Frydenberg need to quickly show they’re onside.

Besides, there’s no point trying to hide from the litany of misbehaviour, theft and incompetence uncovered by the commission. And releasing the interim report doesn’t bind the government to any action.

The bigger challenge for the government will be in the final report to be delivered in February – unless Mr Hayne asks for more time.

Indeed, the action that counts most for the finance industry is yet to be formulated. There is another round of commission hearings scheduled for November to examine what policy should flow from the six rounds of excruciating disclosure. It will be the recommended policy changes that will most disturb the industry and test the government’s mettle.

There is much the Royal Commission has not uncovered and one area – the role and performance of receiver/administrators – that wasn’t in the terms of reference. There are many bankers, insurers and wealth managers feeling very lucky not to have received the attentions of counsel assisting.

Most obviously, the Big End of Town’s CEOs and chairmen were mostly spared embarrassing questioning about what they knew, what they should have known and their general competence. It was notable – and I think regrettable – that companies largely nominated their fall guy to take the stand and the heat, rather than expose the people with the ultimate responsibility and the fattest pay-packets.

One example: nearly all major general insurance companies here have been selling “junk” insurance of one kind or another. If time and resources were unlimited, the CEOs of each could have been held to public account.

But both time and resources are limited. For the purposes of restoring faith in the finance sector, it has to be enough to eviscerate one or two to demonstrate the point and move on.

As it turns out, the banking part of the Royal Commission may be the least affected by the interim report as banking has mainly sniffed the wind and got ahead of likely recommendations.

Only one of the big banks is trying to stick with vertical integration of financial advice and wealth management. Lending standards were already being tightened before the Royal Commission was established.

The biggest kicks tomorrow may well be for the life and general insurance industries and our alleged regulators. Their failures are yet to be fully addressed.

As for our $2.7 trillion superannuation industry, it will be interesting to see where Mr Hayne heads on the key question of intent when dealing with money that is subsidised by the tax system and is mostly provided by compulsion.

The compulsion and subsidy should make the treatment of superannuation funds different to investing money outside of super, arguably requiring a higher standard of care and intent.

It’s a bit like the difference between me wanting a printing job done with my own money for my own purposes and, say, a member of parliament using taxpayers’ funds for electorate material. If I pay more than necessary for a printer who subsequently donates money to my favourite charity, that’s entirely my own business. But you’d think the MP would have a clear responsibility to be frugal with other people’s money and avoid any suggestion of conflict of interests.

What the royal commission has shown with super is that there is a clear difference in outcomes when the primary intent is the benefit of the customer or the profit and bonuses of the advisors and fund managers.

That’s where Mr Hayne’s final report could prove a particular challenge for the government and the lobby groups that have been backing it. A requirement across all facets of the superannuation industry to act in the customer’s best interests will be, shall we say, “interesting”.

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