Royal Commission report released

Daniel Fowler
February 7, 2019

HE GOT the premier's job after Barry O'Farrell came a cropper with a bottle of undeclared Grange, now Teflon Mike Baird is in a box seat to take over at NAB after his boss got a roasting from royal commissioner Kenneth Hayne. It recommended the abolition of "money for nothing" commissions on loans and referred 24 cases of alleged bad behavior for possible legal action. Most are seeking to sell their financial advice and wealth management units, where numerous problems occurred. The regulator has curbed some risky (and more lucrative) home lending, while banks are spending hundreds of millions of dollars upgrading outdated IT systems and forking out hundreds of millions more to compensate ripped-off customers. Among the wealth managers, AMP ((AMP)) is up 9.5% and IOOF Holdings ((IFL)) 13.9%.

Bank shares soared, driving the Australian financials index to its biggest daily rise since March 2009. There are also calls for at least three unnamed institutions to face criminal charges for dishonesty.

While the changes are likely to make the financial sector more liable to be punished for violations, banks in the world's fourteenth-biggest economy have been spared any enforced breakup or interference in the way they choose to lend money.

NIBA is continuing to review other proposals in the Hayne report and will clarify whether a recommendation for mandatory individual financial adviser registration extends to brokers. And he specifically noted that engaging in dishonest conduct in relation to a financial product carries a maximum penalty of 10 years in prison under the Corporations Act.

At time of writing, AMP shares were up nearly 8% on Tuesday, Westpac shares were up 4.3%, and Commonwealth Bank of Australia and ANZ shares were up 3.6% and 3.4%. Hayne finds the NAB board were not given sufficient information about the long-standing misconduct, which they heard about well after it had been uncovered and the Australian Securities and Investments Commission involved.

Now the government has not adopted the report's proposal to ban commissions for upfront commissions for brokers, however, Labor has indicated it supports the Hayne reforms.

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Henry and Thorburn responded today in a media release, the chairman saying the bank "welcomed" being challenged by the royal commission. "Having heard from both, I am not as confident as I would wish to be that the lessons of the past have been learned", Hayne wrote.

"The Ken Henry that I know and work with every day, has integrity, has values, puts customers first, lives in a small town in Australia, has always thought long term and done what is right for Australia".

The report from Hayne, a former High Court justice, found that the industry's problems were exacerbated by an unwillingness to accept responsibility.

Authorities were urged to consider laying charges for misconduct like charging fees for services not rendered, including instances at major lenders Commonwealth Bank of Australia, National Australia Bank Ltd and Australia and New Zealand Banking Group. Compensation alone may eventually top A$1 billion, ASIC's then-deputy chairman Peter Kell told the inquiry. We led the sector in calling for the royal commission to be held.

Veteran bank analyst Brian Johnson of CLSA believes the recommendations of the Royal Commission report are broadly in line with his expectations and given the banks have already begun to implement numerous recommendations (and their share prices already de-rated), he thinks banks stock prices could now move higher.

The Sydney Morning Herald on how banks haven't escaped unscathed.

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