How financial institutions overseas handle conflicts of interest overseas will feature heavily in the Hayne royal commission’s final months of deliberations, if its latest information gathering is anything to go by.
Senior counsel Rowena Orr focused much time during her questioning of CBA chief executive Matt Comyn on Monday on what the banking executive knew about how foreign financial institutions might have changed their practices relating to conflicted sales practices.
In particular, Orr pressed Comyn on conversations and research he’s conducting relating to Dutch institutions. She also highlighted the experience of the UK system and regulator in recent years, which have moved to reduce conflicts inherent in sales networks owned by financial institutions.
The Hayne royal commission also published a background paper within the last week highlighting aspects of foreign financial services regulation, notably in the US, Netherlands and the UK. The paper was penned by UNSW’s professor Pamela Hanrahan.
Hanrahan’s study drew on jurisdictions with broadly similar levels of participation by households in markets for financial products and services and because they’d recently reformed their regulatory arrangements for retail financial services.
The Comyn questioning on Monday opened the 7th round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hearings, where chiefs from the country’s largest institutions, including Macquarie Bank and AMP, will appear, along with heads of ASIC and the Australian Prudential Regulation Authority.
Orr stated during her opening remarks that the latest round of hearings would not “go over old ground” but rather would explore examples of misconduct and focus on its root causes.
“The purpose of this round of hearings is not to hear further apologies or expressions of regret. We do not think that will assist you in fulfilling your task,” Orr said.
Conflicts within the mortgage broking network and within the CBA branch network’s “front line” staff were the main areas of Orr’s interest.
Comyn said he studied the Netherlands mortgage broker model in 2016, when the country’s regulators made banks charge a flat fee to preserve the competitive nature of the broker channel. In the Netherlands, regulators also put a cap on variable compensation for bankers of 20 per cent of their fixed pay and also introduced a fixed fee for mortgage brokers.
Orr questioned Comyn about why he didn’t move to a similar model, even though he had considered it, as revealed by an email exchange he’d had with CBA’s former chief executive Ian Narev in 2016.
While Comyn said he believed the remuneration practices at the time of the email exchange with Narev were justified, he concluded that his view had changed in light of the findings of the royal commission.
Comyn said he believed the industry’s impact on the implementation of the Future of Financial Advice (FoFA) reforms had not been a success.
“The failures include not having required customers to opt-in to pay ongoing fees for financial advice and not removing conflicted remuneration earlier,” Comyn said. “There were mistakes in relation to the carve-outs, poor decisions and poor judgement…and the way banks transited from fee carve-outs, which led to issues around fees for no service.”
