Introduction
Thank you to the Victorian Chamber of Commerce and Industry for hosting me today.
On 4 February 2019, the Government released its response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, committing to take action on all 76 recommendations made by Commissioner Hayne and, in key areas, to go further. Today I am pleased to announce the Implementation Roadmap setting out how the Government will deliver on its comprehensive response to the Royal Commission.
It is a reform package that represents the largest and most comprehensive corporate and financial services law reform process since the 1990s when the Corporate Law Economic Reform Program began.
Australia's financial services sector, in terms of share of GDP, is the single largest sector in the economy at around 10 per cent. The sector employs around 440,000 people and contributed $163 billion to the Australian economy in 2017/18. It is also a critical enabler of activity across the economy and is fundamental to the financial security and wellbeing of every Australian.
With:
- 3.3 million households holding a mortgage over their primary residence;
- over 2 million Australians having seen a financial adviser in the past 12 months;
- Australians receiving over $23 billion in pay outs on insurance policies a year; and
- more than 15 million Australians having superannuation accounts which together total over $2.7 trillion in retirement savings;
it is absolutely critical that the financial services sector works in the interests of consumers and small businesses.
History of reform
The Coalition has a long and proud history of reforming the financial system.
We commissioned the Campbell Inquiry, which reported in 1981, and the Wallis Inquiry, which reported in 1997. Both of these inquiries spurred major financial and economic reforms, giving birth to much of the current financial system architecture.
Continuing this tradition, in 2013, we initiated the Financial System Inquiry (FSI) which involved a 'root and branch' review of the financial system.
While Australia's financial system had withstood the enormous stresses of the global financial crisis and performed better than almost any comparable system in the world, it was clear on coming into office that not all the international lessons of the crisis had been learned in Australia.
The FSI found that while Australia's financial system had performed well since the Wallis Inquiry, it also found the system had a number of weaknesses, including that it remained susceptible to financial shocks and that unfair consumer outcomes remained prevalent.
The FSI and the Government's response have led to a modernisation and strengthening of our regulatory framework such that our financial system is undoubtedly more resilient today than before the last financial crisis. Our major financial institutions are now regulated even more intensely and are required to hold even more capital - at levels that ensure they are 'unquestionably strong'.
The reforms from the FSI improved outcomes for consumers not just because we had a stronger and more robust system that was better placed to deal with future shocks but also because reforms made the system fairer. Reforms such as:
- Making financial product issuers and distributors directly responsible for ensuring their products are only sold to those who will benefit from them;
- Giving ASIC the power to intervene where there is a risk of significant consumer detriment. ASIC is already using this new power, recently proposing an intervention to protect vulnerable consumers exposed to potentially harmful short term lending models; and
- Stopping consumers being charged excessive surcharges on their credit card payments.
The Government didn't stop at the FSI. Over subsequent years we introduced significant reforms to further improve accountability and consumer outcomes in the financial system. Among them:
- Introducing the Banking Executive Accountability Regime (BEAR) to ensure banks and their senior executives are held to account for their actions.
- Establishing the Australian Financial Complaints Authority (AFCA), a one stop shop for dispute resolution to ensure consumers and small businesses get a fair hearing when they have a dispute with their financial services provider.
- Significantly increasing penalties for financial sector misconduct to ensure that the penalties for wrongdoing are commensurate with the harm caused. The maximum civil penalty for companies is now set at the greater of three times the benefit received, 10 per cent of turnover or $10.5 million, and cover a greater range of misconduct including where financial services licensees fail to act efficiently, honestly and fairly.
- Passing legislation to enable open banking in Australia and empowering consumers to seek out banking products better suited to their needs, and
- Passing two major pieces of legislation to protect member outcomes in superannuation and address the erosion of balances from inappropriate fees and insurance.
The Royal Commission - highlighting the cost of misconduct
In December 2017, the Government established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and appointed former High Court judge, Honourable Kenneth Hayne AC as its Commissioner.
Receiving over 10,000 public submissions, conducting 68 days of hearings and calling more than 130 witnesses, the Royal Commission shone a spotlight on the extent of misconduct and conduct falling below community standards and expectations across the financial system.
I want to again acknowledge the extraordinary work of Commissioner Hayne and all those involved.
Through the course of the Commission we heard about dead people being charged fees for no service, the pressure selling of worthless insurance policies to vulnerable individuals and some firms misleading our financial regulators and choosing not to cooperate with AFCA in the resolution of disputes with their customers.
Commissioner Hayne found that much of the conduct he identified could be traced to financial institutions and individuals preferring the pursuit of profit and personal gain over any other purpose.
Commissioner Hayne put it succinctly:
'two themes recurred: dishonesty and greed'.
More importantly, the Commission highlighted the cost of this misconduct – of broken lives and families.
Let there be no doubt that the Morrison Government is committed to implementing our response to the Royal Commission and let there also be no doubt that we will make the necessary changes to restore Australians' faith and trust in the system.
The Government's Royal Commission response will drive lasting change in the sector.
In his Final Report, Commissioner Hayne made 76 recommendations for reform. Of these, 54 recommendations were directed to the Government, 12 to regulators and 10 to industry.
The Government responded to the Royal Commission's Final Report within four days and agreed to act on all 76 recommendations.
In a number of important areas, the Government promised to go further, making an additional 18 commitments.
These additional commitments are important in fully addressing the issues identified by Commissioner Hayne in his Final Report, but for which he did not make specific recommendations.
They include:
- Extending the design and distribution obligations to a wider range of financial products to ensure consumers are not mis-sold products.
- Reviewing the co-ordination and funding of financial counselling services, including any gaps or overlaps in current services and the adequacy and delivery of funding. This review has been completed, and the Government is considering its response.
- Expanding the remit of AFCA to consider eligible financial complaints dating back to 1 January 2008 – consistent with the time period reviewed by the Royal Commission. AFCA estimates that this will allow thousands of consumers and small businesses that have suffered misconduct but have not had their case heard to access redress.
The Government has also committed to implementing four additional measures to strengthen ASIC's enforcement powers, as recommended by the ASIC Enforcement Review Taskforce in 2017.
Our response of more than 70 commitments represents a truly comprehensive package of reforms to:
- Strengthen and expand protections for consumers, small businesses and those in rural and remote communities.
- Ensure we have strong and effective regulators.
- Enhance the accountability of financial firms, their senior executives and boards, and
- Further improve remediation and redress for consumers and small businesses harmed by misconduct.
The Australian community and those who have suffered from financial sector misconduct expect and deserve Commissioner Hayne's recommendations to be implemented consistent with our response, and that's what we will do.
Implementation is already substantially under way
The Government has made significant progress in implementing its response. We have already implemented 15 of our commitments, 8 of which relate to Commissioner Hayne's recommendations and 7 to our additional commitments. We have 24 streams of work under way.
Commitments already implemented include:
- Banning superannuation funds from treating employers, which will ensure that trustees do not use inappropriate means to influence employers to select a fund for their employees.
- Ensuring that trustees and directors of superannuation funds are subject to civil penalties for breaches of their best interests obligations.
- Funding the payment of around $30 million in legacy unpaid determinations from the Financial Ombudsman Service and the Credit and Investments Ombudsman.
We have also moved swiftly to act on the Royal Commission's recommendation to conduct an APRA Capability Review. The Review, chaired by Mr Graeme Samuel AC, was released on 17 July and made 24 recommendations, of which 19 were directed to APRA and the remaining 5 were directed to the Government.
Implementing a complex and wide-ranging financial services reform agenda
Commissioner Hayne has advocated for changes to be made 'carefully and simply'.
He stated that 'adding a new layer of regulation will not assist' but will only add to 'what is already a complex regulatory regime'.
Of the recommendations directed to Government, 44 require primary or subordinate legislation resulting in amendments to over 15 different Acts and regulations.
As I said in my introduction, the Royal Commission reforms mark the largest and most comprehensive corporate and financial services law reform process since the 1990s.
Over the next 18 months these reforms will dominate the Treasury's legislative program, with the work required equivalent to almost three-quarters of its current program. It's worth noting that Treasury's legislative program is the largest across Government, and has consistently represented a quarter of the Government's overall legislative agenda.
The challenges in implementing complex large-scale reform can also be seen with some past financial reform efforts:
- The Future of Financial Advice reforms which, though significant, were considerably more limited in scope, took almost 23 months from when the Parliamentary Joint Committee on Corporations and Financial Services tabled its report on November 2009 to when legislation was first introduced in October 2011.
- The Super System Review – otherwise known as the Cooper Review – which reviewed the governance, efficiency, structure and operation of the superannuation system, provided its final report to Government in June 2010. The first piece of legislation from was introduced into Parliament in November 2011 – 16 months from the completion of that review.
Irrespective, the Government recognises that despite its scale, implementing the Royal Commission on a timeframe consistent with prior reforms is simply not consistent with the community's expectations.
The Financial Services Royal Commission Implementation Roadmap
And so today, I'm pleased to release the Government's Financial Services Royal Commission Implementation Roadmap.
The Roadmap represents the Government's commitment to deliver its response to the Royal Commission. It sets out a timeline for implementing each of the Government's commitments and in doing so, provides clarity and certainty to consumers, industry and regulators.
Under the Roadmap:
- by the end of this year, more than 20 commitments, around one third, will have been implemented or have legislation before the Parliament;
- by mid 2020, more than 50 commitments, close to 90 per cent, will have been implemented or have legislation before the Parliament; and
- by the end of 2020, remaining Royal Commission recommendations requiring legislation will have been introduced.
To achieve our implementation timetable, further resources will be provided to the Financial Services Reform Taskforce within Treasury for the development of legislation, coordination and monitoring of progress, and to commence work on simplifying the law as recommended by Commission Hayne. Additional resourcing will also be provided to the Office of Parliamentary Counsel for legislative drafting.
For measures contained in legislation introduced into the Parliament before 1 July next year, the Government expects the majority to commence by 1 July 2020 or from Royal Assent.
Many of these will be measures to strengthen the financial regulators' powers and their effectiveness. These should, of course, start as soon as possible.
In other cases, the problems that the recommendations are aimed at are well known to industry and have been telegraphed well in advance. For these recommendations, industry need not wait – indeed, should not wait. Some in the industry have already moved pre-emptively in a number of areas and I encourage others to follow.
Implicit in our implementation plan is that consultation on individual measures will be focussed on how the measures can best be implemented, not whether they should be implemented. The Royal Commission's recommendations and the Government's response are clear, now is the time for action, not more debate.
Achieving this ambitious timetable will require the Parliament to deal with the reforms constructively and with a sense of urgency. My undertaking today is that we will work closely with the Opposition to ensure they are properly briefed on each piece of legislation before being introduced into Parliament. This will begin with the offer of a briefing by Treasury on the Implementation Plan.
Given both the Government and Opposition agreed to act on the Commission's recommendations, we expect to achieve passage of relevant legislation without undue delays.
The financial regulators also have an important role to play
Just as important as the actions we will take is the role financial regulators will play in driving change in the financial sector.
As Commissioner Hayne stated: 'too often, financial services entities that broke the law were not properly held to account'.
The Royal Commission made 12 recommendations to the regulators, aimed at strengthening their regulatory oversight of the sector and approaches to enforcement.
Shortly after the release of the Final Report, I wrote to the APRA Chair, Mr Wayne Byres, and the ASIC Chair, Mr James Shipton, to underline my expectation that they consider seriously and respond appropriately to the findings and recommendations of the Royal Commission.
The Government also announced in the 2019-20 Budget that it is providing over $550 million of additional resourcing to ASIC and APRA. This additional resourcing will allow ASIC and APRA to strengthen and intensify their approach to enforcement and take on expanded responsibilities to tackle misconduct in the financial sector.
Both ASIC and APRA have subsequently released their plans for actions they will take in response to the Royal Commission. Notably, both regulators have moved quickly to adopt tougher enforcement stances that will more publicly and forcefully denounce misconduct.
The Government expects ASIC and APRA to swiftly implement these recommendations in a manner consistent with the Government's own implementation roadmap.
Primary responsibility for improving conduct lies with financial institutions.
While changes to the regulatory framework along with effective action by the regulators are important, as Commissioner Hayne made clear:
'primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management.'
It is imperative that the financial services industry takes action now to:
- Comply with the law.
- Heed the lessons of the Royal Commission.
- Ensure they follow not only the letter but also the spirit of its recommendations; and
- Truly put customers at the centre of their businesses.
This includes industry being open and transparent in their dealings with financial regulators and AFCA.
I have been watching closely the progress the industry has been making in relation to the implementation of recommendations directed to it. I expect them to also align with the urgency and priority the Government is giving to this task. The Government and Australians more broadly will not tolerate anything less.
To ensure there is transparency in relation to the actions being taken by industry and that they are held accountable for these actions, following a recent request by the Government, the House of Representatives Standing Committee on Economics will inquire into progress made by major financial institutions, including the four major banks, and leading financial services industry associations in implementing the recommendations of the Royal Commission.
As previously announced, the Government will also establish an independent review in three years' time to assess the extent to which changes in industry practices have led to improved consumer outcomes and the need for further reform.
There will be a similar review into the regulators' actions, to be undertaken by the new financial regulator oversight authority that the Royal Commission recommended, and the Government agreed, be established.
For the Government, these two reviews will be a point to critically and systematically appraise how far the industry as well as the regulators have come in addressing the issues raised by the Royal Commission.
Closing Remarks
Delivering on Commissioner Hayne's recommendations and restoring trust in Australia's financial system is a key part of the Morrison Government's economic plan.
We all want to see an improved financial system.
One where we have engaged and confident consumers and small businesses.
One where we have financial institutions providing the products and services that Australians want and need.
A system supported by an efficient and effective regulatory framework and regulators, that embodies the simple yet compelling norms of conduct articulated by Commissioner Hayne:
- Obey the law.
- Do not mislead or deceive.
- Act fairly.
- Provide services that are fit-for-purpose.
- Deliver services with reasonable care and skill, and
- When acting for another, act in the best interests of that other.
There is no understating the importance of the Royal Commission and its findings to the critical task of restoring trust in Australia's financial institutions.
Commissioner Hayne was clear in his diagnosis of the problem and deliberate in his prescription of the solution.
This roadmap released by the Government today underlines our determination to bring about change to the financial system by implementing the Commission's recommendations both swiftly and effectively.