Hayne recommendations set a new benchmark for financial institutions: EY

Sydney, 6th February, 2019

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The Financial Services Royal Commission was an important process in the advancement of Australia’s financial services sector and its recommendations will result in significant changes to insurance, superannuation and banking distribution models, the effects of which will be felt throughout the broader economy, according to EY.

“The final report delivered a pragmatic, common-sense conclusion to the Royal Commission proceedings and, with the government committing to take action on all 76 recommendations, financial institutions should be proactive in considering their implementation plans,” Graeme McKenzie, EY Oceania Financial Services Leader said.

Financial institutions should also expect to feel the effects of increased enforcement from the ‘twin peaks’ of APRA and ASIC, with the report outlining mechanisms to enhance the enforcement powers of those regulatory bodies and making them accountable to a new regulatory oversight body.

“The final report doesn’t deliver any dramatic recommendations. Rather, Hayne has taken a measured approach – simplifying legislation by removing exclusions, amplifying accountability, using remuneration as a critical tool for directing behaviour and conduct, building on existing industry tools and constructs and strengthening the regulators to allow for increased adherence and enforcement.”

“Hayne’s comments around culture sent a clear message to boards that responsibility for misconduct lies with the entities concerned and those who manage them; their boards and senior management. Management and boards need to consider that, while they are busy planning for and executing these changes, they also need to communicate more actively, often and openly with both regulators and shareholders,” Mr McKenzie said.

The report does herald significant changes facing some sectors, however. Recommendations to cease ‘hawking’ and cross-selling of products and services will significantly change insurance, superannuation and banking distributions models, and institutions need to begin planning for this immediately.

“As expected, the mortgage broking industry will also experience disruption. Notably this includes the elimination of trail commissions and the regulation of mortgage brokers as financial advisors, a three-year phase in period, and the government not fully committing to the ‘borrower pays’ model,” Mr McKenzie said.

“While there will be an extended implementation period as the various recommendations make their way through the system, we encourage financial institutions to get on the front foot and ensure they are working to adopt them ahead of any formal deadlines.”

“As Hayne pointed out in the report, the ‘failings of organisational culture, governance arrangements and remunerations systems lie at the heart of much of the misconduct’. The sector now needs to begin the important task of rebuilding trust, particularly in light of increasing community, government and regulatory expectations around key issues such as culture, leadership, conduct and governance,” Mr McKenzie said.

EY will issue a more detailed analysis of the Royal Commission’s final report in the coming days.

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