After many months, the final Royal Commission Report has been handed in by Commissioner Hayne.

As a reminder, Commissioner Hayne was tasked with looking at the Banking, Superannuation and Financial Services industries.

Royal Commission news

The Royal Commission made 76 recommendations, with particular changes to the mortgage broking industry.

It remains to be seen how much the shareholders of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), AMP Limited (ASX: AMP) and so on will suffer. Some of the recommended changes won’t happen for at least a year.

Commissioner Hayne has referred potential criminal breaches by some of the insurers, super trustees and banks. But he didn’t find that those were definitely criminal, just that it was possible. In total there are 22 individual entities to be referred to APRA or ASIC.

Commissioner Hayne made four main observations:

  1. The poor conduct that has been identified was driven by profit, including personal gain, rather than a focus on the client’s needs
  2. Businesses and individuals behaved poorly because they had the power, consumers didn’t have access to information to negotiate terms or challenge what was happening.
  3. Consumers thought they were dealing with independent advisers, but actually, those advisers were being paid by financial institutions, meaning there was a major conflict of interest.
  4. The regulators didn’t properly punish the financial service entities that broke the law

Mortgage brokers in the firing line

The Royal Commissioner has recommended the industry move to a fee-based model from a commission-based fee. Trail commissions which are paid for the length of the loan will be banned on new loans from July 2020.

Ultimately, mortgage brokers are working on behalf of customers, not banks, so Commissioner Hayne made a recommendation that a best interest duty law is introduced.

Government response

Treasurer Josh Frydenberg said that the banks and other entities, “fell well below community expectations“.

He also said that the government was acting on all 76 recommendations, and going further in some regards. However, he didn’t accept that the government should accept any blame for not getting on with the Royal Commission sooner.

How about the big four banks?

ANZ and CBA seemed to have passed Commissioner Hayne’s test.

He said of CBA: “I was persuaded that Mr Comyn, CEO of CBA, is well aware of the size and nature of the tasks that lie ahead of CBA.”

With ANZ he said, “I have little doubt that Mr Elliot, CEO of ANZ, is also well aware of the size and nature of the tasks that lie ahead of ANZ.

However, on Westpac, he noted that it alone is holding onto some aspects of its wealth business. The challenges are different, so “only time will tell whether that proves to be right.”

But on NAB he was critical and said it stood apart. Commissioner Hayne said, “I am not as confident as I would wish to be that the lessons of the past have been learned.” He criticised the response of Chairman Dr Henry and NAB CEO Mr Thorburn for not being willing to accept criticism and that the fees for service were simply carelessness with system deficiencies, despite this likely to have cost more than $100 million.

But, Commissioner Hayne did not formally recommend breaking up the bank vertical integration models, just that there should be a lot more disclosure.

Finally, what about bank lending?

The initial suggestions don’t seem to want banks to heavily increase lending restrictions.

But, it’s likely that the current standards of bank lending where banks are seeking to verify income and expenses much more diligently will remain. The Royal Commission is unlikely to add any more fuel to the fire of the dropping house prices, but there was no quick fix to boost house values either.

I think investing in ASX bank shares won’t be an easy decision to make yet, but it does seem they won’t be facing the worst of the report.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).