Aftermath of the Royal Commission

In August 2016 the then Treasurer, Scott Morrison, described the opposition’s push for a Royal Commission into banking and insurance as nothing more than “a populist whinge”. He went on to say “I think there is the great risk that if the opposition continues to engage in this recklessness that the only product of that approach could be to undermine confidence in the banking and finance system”.

Rich irony! Yes, confidence in the banking and finance system has now been undermined as a result of the Royal Commission, but only because of the uncovering of activities that had blatant disregard for the welfare of the very customers the banks were meant to serve and assist.

The Commission has resulted in a healthy purge of a system that collected fees from deceased customers, set up bogus accounts for school children, charged fees for no service and upsold products which were not in the interest of its customers and in many cases were inferior to the products the customers already had.

And the bank owned superannuation funds! Their financial planners received a scathing report on the commission driven culture and fee for no service while exploiting loopholes to retain commissions already banned by law. ‘Misleading and deceptive conduct’ was a phrase that kept coming up in relation to charging trailing commissions to customers who were told the super products were ‘no commission’. The Royal Commission used ‘community standards’ as the litmus test and the retail super funds failed miserably.

The vertically integrated model of financial planning advice, particularly as employed by banks or bank owned superannuation providers, presents an inherent conflict of interest. Planners receive commissions for selling insurance and superannuation policies managed by the banks they work for. How can this be in the best interest of customers? It is no wonder why the Royal Commission pointed this conflict of interest out and roundly criticised the big four banks for their culture of aggressive selling.

Insurance companies did not fare much better. The Commission investigated areas such as delay and obfuscation of claims for flood victims, outdated definitions of medical conditions such as heart attack to limit the number of claims accepted, the use of excessive surveillance, ‘fishing’ for areas of non disclosure so that claims could be declined, charging dead people premiums for life insurance (another rich irony!) and charging members premiums for insurance which they could not claim. The Commission strongly criticised the culture of large insurers and proposed a number of measures such as prohibiting insurers from undertaking surveillance of people who have been diagnosed with mental health issues. In many instances the large insurers were seen to be in flagrant breach of the very foundation of the Insurance Contracts Act 1984 which is to act with the “utmost good faith” towards insured customers.

For those expecting a seething report on industry funds, including many in government, there was serious disappointment. CEOs of several large industry funds were interviewed and areas such as marketing expenditure (fox in the henhouse ad), investment selection, and disclosure were discussed, but compared to the scathing report on retail funds, the industry funds sailed through the investigation. Not only have the industry super funds outperformed retail funds with superior returns for members, but they have also demonstrated a strong governance model. Again, a rich irony when the government has been strongly advocating a revised board structure and roundly criticising industry funds. Perhaps for their excellent performance? Or their superior governance model?

In relation to the Commission’s findings APRA Chairman Wayne Byres said “The Royal Commission has suggested, amongst other things, that regulators can and should do more to actively enforce standards of behaviour within the financial sector, and punish those who breach them. Based on what has been revealed, that is quite a reasonable conclusion”.

On behalf of the Trustee and the NGS Super staff, we would like to extend a very happy and safe holiday season and our best wishes for 2019!

Bernard O’Connor
NGS Super
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