7 February 2019
Will kiwis gain from damning review of Australian banks?
After a gruelling seven-round bout spanning nine months, almost 250 witness interviews and 10,323 public submissions, the Australian Royal Commission (RC) into financial services landed one last blow on February 1 with the delivery of its final report.
The parting RC shot has some heft behind it: over 1,100 pages of copy spread across three volumes including 76 recommendations (which the Australian government has promised to act on).
In the wake of the final report, Royal Commissioner Kenneth Hayne referred at least 25 criminal or civil charges to authorities.
Now the real battle begins.
But to what degree the RC financial fight spills to this corner of the Tasman remains undecided.
Some commentators, including Shane Solly of Harbour Asset Management, suggest New Zealand borrowers may find it tougher, and more expensive, to get credit as Australian banks adjust to the RC restraints.
“We expect access to bank debt is going to get more difficult,” Solly told media.
Intuitively, too, it would seem New Zealand can’t avoid further fallout from the RC. Australian financial institutions own New Zealand’s four biggest banks. Other Aussie companies such as AMP and a raft of insurers criticised by the RC have extensive New Zealand operations.
Yet in spite of the strong cross-Tasman corporate ownership links, very few of the RC findings apply directly to the New Zealand market.
For example, Hayne focuses much of his ire on the Australian financial advice and superannuation industries, which are both considerably larger and more complex than their New Zealand counterparts.
The Australian superannuation system currently boasts about $3 trillion in assets under management compared to the roughly $50 billion sitting in KiwiSaver accounts.
Unlike the KiwiSaver system, Australian super is fraught with tax and other technical potholes that underpin strong demand for financial advice.
Meanwhile, the RC report cites figures showing Australia has over 25,000 fully-fledged financial advisers: by contrast, New Zealand has about 1,800 authorised financial advisers (AFAs) – roughly analogous to a qualified Australian financial planner – and 6,000 or so registered financial advisers (RFAs) who specialise mainly in life insurance and mortgages.
The Hayne report also details the convoluted history of the Australian financial advice industry, which saw banks and insurance firms splash out billions to secure ownership of once-independent advisory businesses. For the most part, this trend bypassed New Zealand, leaving the local advice industry largely free of the byzantine ownership conflicts highlighted in the RC.
However, as Finance Minister Grant Robertson pointed out following the release of the final RC report, the New Zealand finance sector has picked up some of the Australian bad habits.
Prompted by the RC, the Financial Markets Authority (FMA) and the Reserve Bank of NZ (RBNZ) delivered a twinset of reports to the government outlining ‘culture and conduct’ problems in the banking and insurance industries, respectively.
In a release, Robertson said the two reviews “identified a number of issues with bank and insurer conduct, and also gaps in how we regulate them”.
For instance, the Labour-led government plans to stamp out a number of remuneration practices in the banking and insurance businesses under ‘fast-tracked’ legislation.
“Some of the issues are similar to those highlighted by the Australian Royal Commission, but not as widespread,” Robertson said.
“We will look closely at the recommendations of the Royal Commission to see whether they should be implemented here.”
The RC recommendations include a number of punchy reforms such as banning mortgage broker ‘trail commissions’ and upfront commission on all life insurance products.
Whether the New Zealand government comes out swinging quite as hard should be known in May this year when it tables a consultation document.
Regardless, the RC influence will undoubtedly be on show in New Zealand reforms – in spirit, if not in detail.
Indeed, the Australian report – like the FMA/RBNZ reviews – peg ‘culture and conduct’ as both cause and cure of whatever problems they have uncovered.
Hayne says the RC findings can be distilled into four fundamental “observations”:
- the connection between conduct and reward;
- the asymmetry of power and information between financial services entities and their customers;
- the effect of conflicts between duty and interest; and,
- holding entities to account.
Governments both sides of the ditch will now have to translate these principles into practice.
And the key to meeting that goal, according to Hayne, will hinge on introducing “better and simpler” rules rather than another layer of complex legislation.
“History shows, as Treasury submitted, that legislative simplification can be a long and difficult task,” Hayne says in the report.
“And I do not doubt that simplifying the law that relates to the financial services industry would be a large task.”
If governments can find a simple financial services formula that puts all parties on an equal footing, consumers and industry can both count that as a win.
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