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Banking royal commission: Kenneth Hayne signals end of wealth model
The Australian 12:00am April 28, 2018
Michael Roddan, Ben Butler
The largest banks and wealth management companies in Australia are at risk of being broken up after suffering a fortnight of explosive and embarrassing revelations at the hands of the royal commission.
Criminal behaviour by Australia’s so-called fifth pillar, AMP, has been alleged, while the corporate regulator is also in the gun after admitting it does not do enough to tackle widespread misconduct in the scandal-stricken financial planning sector.
Admissions from senior executives taking the stand at Kenneth Hayne’s royal commission have shaken the powerful financial sector and forced Malcolm Turnbull to air his regret at opposing the year-long inquiry into misconduct in the industry.
AMP, one of the country’s largest financial conglomerates, and celebrity adviser Sam Henderson are now facing the possibility of criminal charges in the wake of astonishing evidence fleshed out at the royal commission.
AMP was alleged to have committed criminal offences by misleading the Australian Securities & Investment Commission, counsel assisting the royal commission, Rowena Orr QC, told commissioner Hayne yesterday.
In a rush of closing submissions by Ms Orr, Commonwealth Bank’s financial planning arm was attacked for incentivising planners to bleed money out of customers against their best interests and ANZ’s subsidiary planning firms were alleged to have breached corporations law.
She said National Australia Bank fomented a culture in which advisers openly flouted the law and one of the country’s largest advice firms, Dover Financial — sometimes unkindly dubbed the financial advice licensee of last resort — might have broken the law by creating an “unfair contract” to which clients were required to sign up.
Reflecting on the evidence presented over the gruelling two-week stretch of hearings, which included financial advice failures at CBA, Westpac, NAB, ANZ and AMP and advice subsidiaries, Mr Hayne said there were “at least three elements at play” that could explain how the structure of the industry factored into the horror stories heard in the inquiry.
“There are product manufacture, product sale, advice, and the way in which those three elements either fit together or don’t fit together according to both existing firm structures,” Mr Hayne said.
He said another issue was the effect of internal measures including remuneration, culture, rewarding good conduct, penalising bad conduct, monitoring and detecting departure from what is seen as desirable.
Last, external measures such as ensuring compliance and enforcing compliance at a company would have to be appraised.
Australia’s biggest banks will now be asked to question if vertical integration can “serve the interests of clients”.
“If so, how?” Ms Orr said.
In their submissions to Mr Hayne, banks have been asked to justify the entangled cross-ownership of businesses and address issues such as conflicted remuneration for financial advisers, the shunting of customers into in-house products and the breakdowns in compliance between parent companies and rogue financial subsidiaries.
Closing submissions for this round of hearings followed embarrassing admissions from ASIC that it does not ban enough dodgy financial planners from the scandal-ridden industry.
ASIC senior executive Louise Macauley, who is responsible for overseeing discipline of financial advisers, told the royal commission the regulator was doing as much as it could given its resources.
Penalties available to ASIC were also not adequate, she said.
Last week, amid public outcry over revelations aired in the commission, the government announced it would accept most of the recommendations of a review of ASIC’s powers and penalties that found they should be beefed up.
Ms Macaulay also admitted ASIC took too long — about two years — to ban dodgy advisers, had never attempted to fine advisers for their misconduct and had only ever taken away one firm’s licence for breaching its obligation to report breaches to ASIC or breaching its general obligation to provide advice honestly, efficiently and fairly.
It came as a key member of the landmark Murray Financial System Inquiry questioned whether recommendations to give ASIC the power to ban dodgy products — which were recently adopted by the government — would even be able to weed out misconduct from the sector.
The government recently produced draft legislation for ASIC’s intervention powers, which would allow it to prohibit toxic products and sales methods from the finance industry.
“What’s been shown is how inadequate the governance and control systems are within these financial organisations, which are too big and too complex to manage,” Kevin Davis, the brains behind the 2014 inquiry, told The Weekend Australian.
“Our thinking was that if you put in place requirements for product design and distribution — that products be good for customers and gave ASIC the power to ban bad products — that would be good for customers.”
Ms Orr said it was open to Mr Hayne to find that in four of the 20 times AMP misled ASIC over a fee-for-no-service scandal that it breached two sections of the Corporations Act that carry criminal penalties.
The royal commission has heard senior managers at AMP put heavy pressure on law firm Clayton Utz to water down a supposedly independent report.
Ms Orr said the commission was open to find AMP chairman Catherine Brenner, chief executive Craig Meller and “particularly” chief counsel Brian Salter, “either marked up or suggested amendments to the Clayton Utz report”.
Mr Meller last week was forced to resign, while Mr Salter has been forced to take leave during another subsequent review.