Overview
The Australian government tasked the Royal Commission into investigating the Misconduct in the Banking, Superannuation and Financial Services Industry. The final report referred to as Hayne’s Final Report was published on February 4, 2019. The report seeks to improve the conduct in the financial industry by reviewing the thin line between legality and ethics (Smith, 2019). One of the major topics of concern, as projected by the Hayne’s Report is the charges of financial advice, without doing any action. Among other issues, the Report made recommendations based on the organizational cultures and the responsibilities held by financial institutions. The report, however, has led to a huge debate due to its controversial recommendations that go against the banking industry business model and could seriously hurt their profitability. The question of sustainability also arises when examining the 2019 Hayne’s Report and the government’s response to its recommendations.
The report analyzed nine critical issues that face the financial industry in Australia. Most of these aspects focused primarily on the nature of institutional governance and its implications to the entire industry. Hayne observed that despite the existence of legal protocols to govern the operations in the industry, it still remains the duty of the organization to come up with models to enact these legal policies (Hall & Wilcox, 2019). Therefore, the degree at which the financial industry achieves efficiency is not only dependent on the legal policies introduced by the government but also the internal policies adopted by the companies. This thus shifts blame from the government to the institutions in case of fraud and misconduct.
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Recommendations for Fees at No Service and their Lack of Ethics
Hayne’s focus on both legality and responsibility of duty led to a few ethical issues. One of the major and most controversial issues is the organization’s ability to offer professional advice, which he refers to as charging fees for no service. Hayne argues that, in pursuit of profitability, institutions have failed to define their ‘professional-advise’ as a legal and justifiable service to the public. Due to the conflict of interest involved, Hayne was particularly concerned with the institution’s duty when offering professional advice (Chalmers, Janda, Robertson, & Jasper, 2018). Unarguably true, organizations offering financial services become clients to the receivers of the advice depending on their financial outcomes. For instance, a company sinking in debt might seek a financial consultant for resources management. Haynes was concerned with the degree to which these institutions or consultants focus on the overall good, ethics, and integrity in offering the services in an industry where there are no regulations or actual definition of such services.
Firstly, Hayne proposed an overall emphasis on quality and competence in the professional advice industry. The report indicated that institutions and individuals should completely transform their services and match it with approved skills and diligence. While quality and competence are vital to the process, Hayne proposal for the party offering the advice to prove that they are not partisan or biased is illogical (Australian Institute of Company Directors, 2019). Banks and other third parties in the industry serve more than one client on a daily basis. These institutions can only dispense advice based on the specific requirements of a client. The requirement also begs the question of the free flow of transactional value where clients are allowed to rate the advice and attach a value to it depending on its efficiency.
Secondly, Hayne also keenly observed the increasing emergence of unregulated financial advisors. On this regard, the report suggested a training program such as AFSL and a streamlined registration of all financial advisors. This process would ensure that all financial advisors operate under-recognized license and abide by a certain level of integrity and ethics. This policy, although necessary would lock out a lot of expertise accumulated by financial analysts. If the Australian government reinforces the need for a license and trading to become a financial advisor, the banking system would spend billions of dollars in accessing skills that are already in the industry.
The third recommendation was the vertical integration of services related to the products when it comes to financial advice. Currently, financial advisors engage the company throughout the lead cycle to oversee the development of financial goals. In most cases, these financial milestones are attached to a certain product. Haynes observed that, although it might be impossible to separate the products from the financial advice and support services, it is vital to a disintegration of this hierarchy might be necessary if it pushes the costs of operations upwards. The proposal is unethical as it directly disrupts the form of business adopted by banks and other institutions. The report does not consider the consequence to all shareholders in the industry.
Critique
The recommendation by Hayne’s report seeks to meet a specific need in the market. When commissioning the report, the government was concerned with the increase in misconduct, and lack of ethics in the financial industry. Therefore, the report by Hynes specifically seeks to fix this institutional malpractice. Most of the recommendations made by the report attack the institutions while defending the clients, who have long agreed and benefited with the current services delivery and compensation system. Louth (2019) reviews the report and terms it as biased and unfeasible, especially when considering the diversified communities that have to comply with the proposed regulations.
Firstly, the issue of Automatic Teller Machine (ATMs) is not well addressed in the report. The commission knew the challenge that faced people living in upcountry. Due to their limited exposure to information, there is no agreement that any services rendered by an ATM machine attract a fee of 2.5$ including checking for balance. This is well known by people living in urban areas where ATMs are run by banks. In the upcountry, the ATMs are run by third parties for profit. It is common for people to check their balances when waiting for funds until they drain their account (Louth, 2019). Hayne’s report did not make references to this challenge despite running a two-year pilot study, which confirmed the challenge.
The report has also been criticized by its lack of consideration of the various interest groups in the country. The Superannuation aspects of the report made it unpractical for the aboriginal people. The Productivity Committee put the preservation age at sixty years, while the average life expectancy for a male aboriginal is 63 years. Before then, these people face financial difficulties. A proposal is necessary to put preservation ages depending on the demographics of the community in question. Generally, Louth (2019) accuses the report of failing to capture the key aspects of the financial industry that enhances its development and vibrancy. He suggested that the proposal by the commission is short of the actual interactions between the consumers and providers of services in the industry. The parties rely on each for the flow of value as well as the payments making it an independent market controlled by national and local economic factors.
By putting all the proposed legal frameworks, the report will constrain the providers of financial services by cutting on their profitability as well as the flexibility of their investment model. If not reviewed, the report could have catastrophic consequences to the marginalized groups. Khoury et al. (2019) observe that Haynes agrees that the proposal is not inclusive. In his defense, he argued that the commission could not review every independent case in the market to help in its policy formulation and that the proposals follow the mainstream opinion. These projections are not accurate where some proposals hurt all the shareholders in the industry. This is evident with the requirement to register all financial advisors, a step that will increase the legal fees for both the providers of the services and their clients. While it is necessary to control the power possessed by financial institutions, it is also vital to protect the industry, which is critical to the nation’s economic growth.
Position
A complete review of Hayne’s report shows that it has the interest of the Australian consumers at heart. Policies such as mortgage brokerage, funeral insurance, and dishonor fees, among other protect the bankers and borrowers in Australian banking and real estate markets. Even the much-criticized policies play a positive role in some situations. However, the policy fails in the integration to meet the demands of all the communities and shareholders involved. In the future, the committee ought to undertake a comprehensive review of these recommendations and embark on customizing them to meet the local demands. For instance, the ATM policy is applicable but should independently consider the consequences meted to the communities living upcountry. Despite the shortcomings, the report created a positive platform for the shareholders in the industry to debate on the confounding issues and come up with a reliable solution.
References
Australian Institute of Company Directors. (2019). Royal Commission Final Report: Executive Summary. Retrieved from https://aicd.companydirectors.com.au/membership/membership-update/royal-commission-final-report-executive-summary
Chalmers, S., Janda, M., Robertson, A., & Jasper, C. (2018, September 29). Greed and dishonesty in the pursuit of profit: The banks according to Hayne. Retrieved from https://www.abc.net.au/news/2018-09-28/bank-royal-commission-kenneth-hayne-key-findings/10317752
Hall & Wilcox. (2019, February 15). The Financial Services Royal Commission? we digest Hayne's Final Report. Retrieved from https://hallandwilcox.com.au/the-financial-services-royal-commission-we-digest-haynes-final-report/
Khoury, F. C., Healy, F., Wilks, M., Critchley, M., Chaaya, M., & Dean, M. (2019, February 5). Beyond the Banking Royal Commission: 9 key implications of the Hayne Report for corporate Australia » Corrs Chambers Westgarth. Retrieved from https://www.corrs.com.au/thinking/insights/beyond-the-banking-royal-commission-9-key-implications-of-the-hayne-report-for-corporate-australia/
Louth, J. (2019, February 5). Banking Royal Commission: How Hayne failed remote Australia. Retrieved from https://theconversation.com/banking-royal-commission-how-hayne-failed-remote-australia-111100
Smith, M. (2019, February 7). Hayne report to push new ethical standard. Retrieved from https://www.investmentmagazine.com.au/2018/09/hayne-report-to-push-new-ethical-standard/
