4 February 2019
Transcript - #2019012, 2019

Press Conference, Parliament House, Canberra

Subjects: Government response to the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation & Financial Services Industry.

JOSH FRYDENBERG:

I’m going to make a statement before taking questions. Today, the Government is releasing the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It’s a scathing assessment of conduct driven by greed and behaviour that was in breach of existing law and fell well below community expectations. The price paid by our community for this misconduct is immense and goes beyond just the financial. There have been broken businesses, and the emotional stress and personal pain has broken lives. In disbelief, the nation has heard evidence presented before the Commission of hundreds of millions of dollars in fees for no service, companies misleading and obstructing regulators, the charging of dead people, the sale knowingly of worthless insurance policies, and who could forget the appalling audio recording of a young man with Down syndrome being subject to high pressure sales tactics resulting in the purchase of a financial product that he clearly did not want, need or understand.

This is why the community’s trust in our financial institutions has been lost and this is why it must be restored. From today, the banking sector must change and change forever. In Commissioner Hayne’s own words, “there can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and their boards and their senior management.” “The undeniable fact,” Commissioner Hayne said, “is that it is those who engaged in misconduct who are responsible for what they did and for the consequences that followed.” This has resulted in the Commissioner making more than 20 referrals to ASIC and APRA, covering a range of misconduct from fees for no service, to best interest duty breaches and misleading and deceptive conduct.

My message to the financial sector today is that this misconduct must end and you must put the interests of consumers first. Consumers must be treated honestly and fairly. My message to the Australian community today is that your Government is committed to making this happen. In responding to this report and taking action on all 76 recommendations, we are putting in place the legislative framework which provides the regulators with the powers and the resources to hold those who abuse our trust to account. If nothing else, the public is entitled to expect that the law is applied and enforced. In outlining the Government’s response to the Royal Commission, I want to make clear that our principal focus is in restoring trust in our financial system and delivering better consumer outcomes, while also maintaining the flow of credit and continuing to promote competition. These objectives are vital to the health of our economy and are therefore vital to the health of our community.

Commissioner Hayne’s recommendations and the Government’s response advance the interests of consumers in four key areas. First, they strengthen and expand the protection for consumers, small business and those in regional and rural communities. Second, they raise accountability and governance standards. Third, they enhance the effectiveness of our regulators. And fourth, they provide for remediation for those harmed by misconduct.

It is important to note that Commissioner Hayne’s recommendations do not include the removal of the Twin Peaks Model. He does not recommend a change of structural separation. Nor the extension of national consumer credit laws to SMEs or changes to the test for responsible lending.

The Government is taking action on all 76 of Commissioner Hayne’s recommendations. First, in terms of enhancing consumer protections, we are doing the following: with regards to mortgage brokers, we are putting in place a best interest duty, banning trailing commissions and volume-based bonuses on new loans from the 1st of July 2020. In terms of moving to a borrower pays remuneration structure, there will be a review in three years of the implications of doing so, bearing in mind that the Productivity Commission, the Murray and the Sedgwick reviews, all raise concerns about the effects of competition of a change to a borrower pays model. We are ending the grand-fathering of conflicted remuneration for financial advisors, effective from the 1st of January 2021. In terms of superannuation, we will ensure fund members only have one account for new members entering the system, a recommendation that mirrors the Productivity Commission’s report into superannuation. We are prohibiting the deduction of advice fees from MySuper accounts. Hawking for superannuation and insurance will be prohibited, preventing some of the most disturbing stories the Royal Commission heard, of vulnerable people being sold, on an unsolicited basis, policies that they didn’t need.

Changes will also be made to the sale of add-on insurance, so that their sale is separated by a period of time from the sale of the original product. For example, today people are being sold a mobile phone and at the same time are being sold basic screen cover insurance, which can cost more than the actual replacement of the screen itself.
There will also be major changes to how the banks deal with distressed agricultural loans; this will include a new national farm debt mediation scheme, a requirement that banks do not charge default interest on agricultural loans, where a drought or national disaster has been declared. The valuation of agricultural land will need to be independently determined from the lending processes. Banks will be required to ensure distressed farm loans are managed by people experienced in agriculture, and receivers are only to be appointed as a remedy of last resort.

Second, enhancing accountability; consumers rightly expect that they be treated fairly and when they’re not that the culprits are held to account. This is why from the first of July last year the government put in place the Bank Executive Accountability Regime, otherwise known as BEAR. The BEAR holds senior executives within large banking institutions personally responsible for conduct that occurs on their watch, and this includes sanctions, such as changes to remuneration, or even disqualification. Commissioner Hayne has recommended that BEAR be extended to insurance and superannuation and that ASIC should have joint responsibility with APRA for the oversight of the BEAR. With respect to superannuation, Commissioner Hayne also recommends that both trustees and directors be subject to civil penalties for breaches of their duties. The Government currently has legislation before the Parliament extending for the first time these penalties to directors and we will now amend the legislation to include trustees. A new system of discipline for financial advisors will also be put in place. With stronger industry reference checking, greater reporting of serious compliance concerns and a new single disciplinary body, with which all advisors must be registered.

Third, ensuring effective and strong regulators. Commissioner Hayne has found the regulators wanting. But he has also recognised that they are taking action to change. The government has recently appointed a new chair, and two deputy chairs of ASIC, and we have committed $170 million in additional funding for our regulators and our agencies equipping them for the task ahead. We will work with our regulators to ensure they remain appropriately resourced.

The Government accepts Commissioner Hayne’s recommendations, to establish a new three person oversight body, for ASIC and APRA, that will monitor their performance and effectiveness, and report to Government. Capability reviews of our regulators will also be conducted every four years, with the government announcing today that Graeme Samuel AC will lead a capability review of APRA, and this will commence shortly. With respect to superannuation, the regulatory roles and powers of ASIC and APRA will be clarified with respect to ASIC becoming the primary conduct regulator. The Government today is also announcing that we will extend the jurisdiction of the Federal Court, to cover corporate criminal misconduct. This will expedite cases that are currently heard before state courts and commonly take over two years to be heard.

Fourth, providing for remediation for those harmed by misconduct. For the first time, the Government is establishing a compensation scheme of last resort. We will expand the remit of the Australian Financial Complaints Authority, known as AFCA, so that they can award compensation for successful claims going back a decade and this is consistent with the period examined by the Royal Commission. AFCA, which today can make binding determinations on industry of up to $500,000 for individuals, a million dollars for small businesses, and two million dollars for agri-businesses, will now administer this compensation scheme of last resort.

Let me be clear, personal responsibility for financial decisions rests with those who make them. However consumers and small businesses, who suffer harm as a result of misconduct, will now have access to redress. The Government will also compensate those individuals who had a prior unpaid determination in their favour by the predecessor bodies of AFCA. These people were never paid, because the institutions responsible were unable to pay. This will see almost 300 consumers finally receive compensation totalling around $30 million as a consequence of prior misconduct. Compensating this cohort of people was supported by the Ramsay Review and also endorsed by Commissioner Hayne. Implementation of the Government’s response will be led by a Treasury Financial Services Implementation Taskforce. Employing 450,000 people and representing nearly 10 per cent of GDP, the Australian Financial system is vitally important to every single Australian. The Royal Commission has not called into question the stability and the strength of our system, but what it has done is shine a light on misconduct which cannot be tolerated. Through both our actions to date and our response today, we are demonstrating as a Government our commitment to ensuring the financial system is working for all Australians and is one they can trust.

Finally, I would like to thank Commissioner Hayne for the outstanding manner in which he has conducted the Royal Commission and express my gratitude and that of our Government for the tireless work of all those who were involved. I wish also to acknowledge those individuals who provided submissions and came forward to give evidence. Their stories and their experiences drives home the necessity of immediate change. Thank you.

QUESTION:

Treasurer, the one recommendation you didn’t fully adopt was fees (inaudible) for brokers. Commissioner Hayne says that having the bank or the lender pay the fee could lead to a fostered dishonest conduct. Given you’re going to wait (inaudible) to implement that, what’s your message in the meantime to the industry, the mortgage brokers and the banks?

JOSH FRYDENBERG:

Let me make it clear. We are taking action on all 76 recommendations. With respect to mortgage brokers, there were essentially three main points. The first was to establish a
best interest duty. Tick, we are doing it. The second was to end trailing commissions. Tick, we are doing it. And the third was to move away from a model where the lender was providing directly a commission, effectively, to the mortgage broker. Now, the Productivity Commission and the Murray enquiry and the Sedgwick review had all recommended against such a change, effectively, issuing a word of caution about what it would mean to competition. And what we don’t want to do is to give a big tick or a free kick to the banks. And effectively, if you would take that business out of the hands of mortgage brokers who are (inaudible) right across our community, you would be giving it to the big banks. And let me just read to you what the Productivity Commission recently said of such a change if it was to take place: “the cost to competition would be high, consumers would desert brokers, smaller lenders and regional communities with few or no bank branches would suffer more than larger lenders”.

QUESTION:

Treasurer, how likely is it the new rules and regulations would actually make it harder for first home buyers to get loans and make it more expensive to get loans as well because of the new regulations, the burden on the banks?

JOSH FRYDENBERG:

I don’t think that will happen at all. In fact, what we’re going to see as a result of this is consumers, whether they’re home buyers, house buyers, young or old, effectively be dealing with financial institutions who are now having to reach a higher standard of conduct. I think we are all beneficiaries from that. What Commissioner Hayne has done is shine a light on misconduct in the sector, which has not only been in breach of existing law, but has fallen well below community expectations. I think all home buyers and lenders will benefit from these.

QUESTION:

Were you wrong to oppose a Banking Royal Commission for sixteen months? And given that history, why should voters trust you now to act on this report?

JOSH FRYDENBERG:

Well, we could debate for hours the failures when Labor was last in office, not forgetting Trio and Opes Prime and Storm Financial, all occurred those failures on their watch. I remember Bill Shorten saying how fantastic the regulatory system was in the financial sector when he was the Minister for Financial Services. But he didn’t call a Royal Commission, he didn’t take action to bring these big banks to account, he didn’t put in place new standards which we have announced today and have been doing since the financial system’s inquiry was initiated by this Government when we first came into power into 2013. I’m focused, David, on the future. And the future is now going to be brighter for 25 million Australians when they are dealing with financial institutions because the set of recommendations from Commissioner Hayne will ensure a higher standard of conduct, will ensure better outcomes in superannuation, insurance, in financial advice and in banking. And I think the regulators have also got the message and that timidity that we may have seen in the past is going to be replaced with a much more front-foot approach.

QUESTION:

On that timidity you talk about from ASIC, are the effectively on notice now to clean up this industry and will the litmus test of that be the referrals of the some 24, I think it is, cases for litigation?

JOSH FRYDENBERG:

Well, I’m not going to get into the specific details of those individual referrals which involve individual companies. But I have spoken to the head of ASIC and to the Deputy Chair and they are focused on ensuring that people who engaged in misconduct are held to account. And I do want to point out that Commissioner Hayne did say that ASIC and APRA, to that effect, are taking action and that action is absolutely necessary. We have provided increased resources and increased powers for ASIC and we’ve also put in place a new chair and two new deputy chairs.

QUESTION:

The Commissioner envisaged, but he stopped short, a new regulatory body that would effectively take cases to court, the same way the DPP does. He stopped short of recommending that. What is your threshold for that to be introduced if ASIC doesn’t succeed in cleaning up this industry?

JOSH FRYDENBERG:

Well, I’m very confident that ASIC will do the job. And he has also recommended, that the Government has accepted, this new oversight body which will look at the effectiveness and performance of both ASIC and APRA, and report to Government. So, those organisations, and I’ve also spoken to Wayne Byers at APRA, they are very focused on the task at hand and I look forward to working closely with them in the period ahead.

QUESTION:

Picking up from Tom’s question, Hayne clearly got to the brink of suggesting that he would take prosecution away from ASIC, right to the brink of it, and said “oh, maybe not, we’ll see what they do.” Does it remain an option on the table for the Government to take prosecution away from ASIC if they don’t come to the table and have a more aggressive approach? And also, just squaring the circle back to David’s question, do you accept that, you’ve said in remarks today, that the banks have let the public down by their behaviour? Do you also accept that the Coalition, by obstructing this Royal Commission for 16 months, has also let the public down?

JOSH FRYDENBERG:

Well, we have no plans with regards to ASIC to bring in this new body that you are referring to. We believe that ASIC will do the job, can do the job and Commissioner Hayne has also already said they are making the necessary changes. With the new leadership at ASIC, they are getting on with delivering better outcomes for Australian consumers. Let me point out, of all the significant things that we have been doing and are continuing to do with respect to the Financial Services sector, including the Banking Executive Accountability Regime, which came into effect from July last year, which the Coalition initiated, which has been strongly endorsed by Commissioner Hayne today by referring to the fact that it now should be extended to other financial institutions across insurance and superannuation. Let me also refer to AFCA the Financial Complaints Authority, which opened its doors at the end of last year, which again the Coalition initiated. Let me refer you to the superannuation legislation that we have before the Parliament, which will ensure millions of Australians will pay less in unnecessary fees whether it is around insurance or other areas that they will be united with their lost accounts, that trustees through the legislation we are amending and directors will be held to account for breaches of the law. That is our agenda, work that we are doing, and like I said when Labor was last in office, they did nothing when they had major financial collapses on their watch.

QUESTION:

The 24 referrals, are they the tip of the iceberg? Are there more things that ASIC and APRA could be looking at and will be looking at?

JOSH FRYDENBERG:

Look, that is a question that you can direct to the regulatory authorities. Like I said, I am not going to get in to a running commentary on the referrals that have been made. Obviously, Commissioner Hayne has looked at these issues very closely, Joe?

QUESTION:

Treasurer, can I just ask you about the legislative time line for the changes you have identified. You have only got a limited number of sitting days, are you going to be able to get what you want through? And the one default superannuation recommendation, will you try and get that through as a priority before the election?

JOSH FRYDENBERG:

Well, let me say very clearly, what we are going to immediately is we are going to update our legislation that is currently before the Parliament to ensure that those breaches of duties by trustees as well as directors, face the penalties as recommended by Commissioner Hayne. Secondly, I am going to give a direction to AFCA immediately to ensure that its jurisdiction for the next 12 months can look back from 6 to 10 years, as I said, to provide that compensation scheme of
last resort. We’re also announcing today, as I’ve said, the APRA capability review chaired by Graeme Samuel who is well known in financial sector circles for his leadership of the ACCC. In respect to those other changes, we only have a few weeks left before we get into the Budget sitting. So, they’re decisions that the Government will take in due course about timing arrangements.

QUESTION:

The report recommends against a whole lot of conflicted remuneration for mortgage brokers, financial advisors and the like, you’re not going to do anything for another 18 months at least, why, given all that time to accept this conflicted remuneration, rather than just axing it now?

JOSH FRYDENBERG:

Well, you have to understand these are major changes for an industry and for existing business models and there needs to be transition periods. If you’re referring to the grand-fathering, for example, for financial advisors in the sort of post-FOFA world, we are obviously allowing some time for that to come in. The same applies as well for abolishing the trailing commissions and the volume bonuses in relation to mortgage brokers.

QUESTION:

Treasurer, Chris Bowen is going pretty hard on Scott Morrison voting against the Royal Commission 26 times...

JOSH FRYDENBERG:

...well, that’s all they’ve got...

QUESTION:

...is it a good opportunity for you to apologise to the Australian people for Government’s position and opposition to this Royal Commission for so long?

JOSH FRYDENBERG:

Well, it’s actually the Government that has been delivering better consumer outcomes for Australians with the reforms that we have been making, reforms that have been endorsed by the Productivity Commission into super, just a few weeks ago and reforms that have today been endorsed by Commissioner Hayne around AFCA and the Banking Executive Accountability Regime, the tougher penalties that we are putting in place. Let me be very clear, the Government is now acting on all 76 recommendations and we are even going further in some respects, in relation to AFCA, we are going further in relation to the application of BEAR, we are going further in relation to the product intervention powers that ASIC will have, we are going further in relation to creating a Federal Court and allowing them to look at criminal corporate misconduct. We are going further then even Commissioner Hayne had recommended. So, not only have we accepted the recommendations, to the point that we are acting on all 76 of them, but we’ve also gone further on a number of areas and he has endorsed the actions that we have been taking.

QUESTION:

Are you wrong to have opposed it for so long?

JOSH FRYDENBERG:

Like I said, we can debate for hours Labor’s failures when they were last in office. It has been the Coalition that has commissioned the Royal Commission and it is the Coalition today that has announced we are acting on all of these recommendations.

QUESTION:

Treasurer, reportedly the Royal Commission has had an impact on the flow of credit in the economy. Now that this report is out there, what impact do you, if any, do you expect that to have on the flow of credit impact to the economy.

JOSH FRYDENBERG:

Well as you know, the growth in bank credit has been below the 10 year average, and a number of factors have contributed to that. But one of the factors, no doubt, has been the existence of the Royal Commission and it has been very telling that the Commissioner has made very clear, Commissioner Hayne in his report, that people who had called for this Royal Commission to be extended longer, he said no, he’s heard from more than 10,000 submissions, all of which have been read, taken into account, and that when you are looking at a key artery of the economy, namely the financial system, you don’t want to be working on it longer than you have to because you don’t want to introduce an element of uncertainty. So that uncertainty has now been lifted, and today we’ve announced that we are acting on all the recommendations. As you know, APRA have also now lifted some of their constraints on investor credit and the housing market, and I continue to make the point to our financial lenders and our banking sector; there is an economic, and there is also a social responsibility, to ensure affordable and accessible access to finance, and that is critical to our economy.

QUESTION:

Mr Frydenberg, Commissioner Hayne was very critical of Andrew Thorburn and Ken Henry, the CEO and Chairman of NAB, to the point where he questioned, he doubted, their ability to do the right thing in implementing these reforms. Do you think their positions are tenable?

JOSH FRYDENBERG:

Look I’m not going to go into the individual cases or individuals. What I would say is in relation to all those cases they are matters for shareholders and for boards. They are not matters for me to specifically comment on. Thank you very much.