Hayne's shock treatment worked

Kenneth Hayne might be determined to watch the anniversary of the banking royal commission’s final report pass in near silence, but he surely won’t be upset to see the commission’s work raked over again in such detail.

After all, this was an inquiry that was designed for maximum shock value.

What Hayne wanted was to jolt the entire system into change – participants, regulators, policymakers and consumers, whose lack of awareness of money matters was carefully exploited by too many in the industry.

The recommendations in the final report were important, but the shock of the public hearings that enthralled the nation may well have mattered more.

The commissioner might be steering clear of the media now, but as the commission progressed he must have known just how powerful it would be to see the victims of bank and wealth industry mistreatment telling their stories on the nightly news, and to watch industry executives embarrassed by the commissioner’s aggressive senior counsel, Rowena Orr, QC, and Michael Hodge, QC.

It is perhaps understandable that there is considerable bitterness in the legal fraternity at the way Hayne and Orr conducted those hearings. The central complaint from some of the senior barristers that represented the financial institutions in the gun is that the deck was stacked against them.

By holding the bulk of the hearings in a courtroom in Melbourne’s Commonwealth Law Courts Building, Hayne created the appearance of a legal trial without the right of reply that a trial typically offers. Witnesses had to prepare to be examined on vast numbers of issues, knowing senior counsel could hone in on a specific area and make them look foolish.

Valid concerns

The best these witnesses could hope for was to defend themselves in written submissions, filed long after the public had moved on. Some lawyers argue that fairness – an ideal Hayne held so dear in his final report – was not always evident during the commission’s hearings. As former Supreme Court judge and barrister Bob Austin told The Australian Financial Review: “Reputations were ripped apart without a proper opportunity for them to defend themselves.”

Having spent hundreds of hours in the stuffy confines of court 4a, there is no doubt these concerns are valid.

But this was from the outset a royal commission into misconduct. Hayne and his team made no secret of their plan to use case studies to tell the bigger story of a financial sector they saw as broken.

No doubt the toll on individuals was great. But as many of the witnesses from financial institutions were forced to concede, this was a sector that had a real problem with accountability.

The power of the commission was that it took us inside these businesses and attempted to track the way decisions were made and problems ignored. It forced executives to personally confront and explain the misconduct in their organisations.

If a few executives were humiliated and intimidated on the way through, Hayne clearly deemed this a price worth paying.

Of course, the question remains: Did the shock treatment work?

Certainly Australia’s wealth sector will never be the same. Mass market wealth management as we knew it has been demolished by Hayne’s exposure of a string of examples of poor conduct in the sector, most notably the egregious charging of fees where no services were provided.

Structural changes

The commission’s push against grandfathered commissions and insistence on higher education standards have also forced structural changes, meaning what’s left looks more like private banking – with a price tag to match.

This has left a large gap in terms of the provision of advice to average Australians, although doubts remain – most notably among senior regulators – as to how many quiet Australians actually need or want the sort of products the wealth industry used to flog.

There can be no doubt Hayne’s brutal criticism of the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority has turned them from soft touches to hard nuts – even if the new attitude sits less comfortably at the latter regulator.

The question of whether APRA and ASIC have quite nailed the balance between supervision and enforcement remains open, but that’s not surprising after decades of a softly-softly relationship with the industry.

Soundings from both sides of the fence suggest the balance between early intervention, constructive criticism and all-out attack on recalcitrants isn’t there yet. But if nothing else, a greater willingness to name and shame has certainly reset the way these regulators engage with industry.

Judging the impacts of Hayne’s shock treatment on the banking sector is harder, in part because the royal commission has coincided with lower interest rates, subdued economic conditions, high household indebtedness and increased technological disruption.

These sectoral factors have all weighed on bank profit margins, but much of the direct financial pain the banks have from the royal commission has come from remediating issues in their wealth businesses.

Hasty retreat

In the core of the banking sector, the biggest impact of the royal commission has been to hasten a retreat from complexity that was already under way.

An illustrative example of this is a review that NAB launched of its line-up of almost 300 products in late 2018, before the royal commission claimed its two biggest casualties in NAB chairman Ken Henry and chief executive Andrew Thorburn.

The review’s simple but telling aim was to figure out if the products still worked as intended. That a bank might need to engage a couple of hundred staff to check that its products actually work for customers speaks to both inherent complexity and Hayne’s theme that the broader banking sector had become too focused on finding pools of profits.

The programs under way across the industry to reduce the number of products on offer, cut technology applications and slash staff numbers are mainly about reducing costs. But they are also designed to make the banks more manageable, such that executives and directors can actually see what is and isn’t working for customers.

These changes to the structures are being underpinned by attitude changes that, over time, should lead to cultural changes.

From the outside at least, the commission does appear to have sparked a change in the way senior executives approach their jobs, with a clear recognition that the sector lost sight of customer needs and community expectations.

The culture, governance and accountability self-assessments performed by the big four banks – and released publicly by all except ANZ – were important exercises that should bring a renewed focus on not just what decisions are being made, but how those decisions are being reached.

Despite what Westpac’s AUSTRAC scandal suggests, there is also a renewed focus on risk management across the sector, which should be buttressed by the Banking Executive Accountability Regime, which pre-dated the royal commission but was heavily supported by Hayne. The BEAR remains legally untested.

The question of whether there might be negative consequences from the terror – and that is the right word – of the royal commission’s public hearings is an interesting one.

Anecdotal evidence suggests it led to an aversion to risk-taking inside the banks, compounding confusion about responsible lending regulations last year.

There’s little doubt that pendulum swung too hard in mortgages for a short time and the banks became overly cautious about assessing borrower suitability. But despite concerns about ASIC’s decision to appeal against the now-infamous "wagyu and shiraz" case, it appears order has largely been restored on the issue of responsible lending.

The corporate regulator’s new regulatory guide – released last December to a tenth of the column inches that the wagyu case received – is a practical document that provides a sensible baseline for the mortgage industry.

Where the terror of the hearings may leave a more lasting scar is in the director community.

The interrogation of directors during the commission served to widen the gap between the community’s expectations of directors and what they actually do.

Boards are not responsible for every little thing that goes wrong in a business – and particularly organisations as large and complex as our banks. They are advisers who set the tone of the business and oversee its systems, processes and strategy.

The worry isn’t that we’ll have a deficit of directors – there will always be someone. But if we can’t close this expectation gap, it will be harder to get the very best people, which our banks clearly need.