Insights / February 7th, 2019

Banking Royal Commission Final Report – The Lowdown


The central task of the Royal Commission was to inquire into, and report on, whether any conduct of financial services entities amounted to misconduct and whether such conduct, practices, behaviour or business activities fell below community standards and expectations. The straight answer is yes.

The Commission received 10,323 submissions and inquired into case studies which identified and described cases that took place over many years which caused substantial loss to customers, yet substantial profit for the entities concerned. Very often, the conduct broke the law and/or fell short of community expectations.

On 28 September 2018, the Royal Commission released its Interim Report, addressing the issues raised in the first four rounds of public hearings held that year – including, consumer lending practices, financial advice, small and medium enterprises, and issues affecting remote and regional communities.

The Final Report focuses on superannuation and insurance. Commissioner Hayne also obtained evidence from CEOs, board chairs and the heads of ASIC and APRA concerning policy and other questions that were raised in the Interim Report.

General rules

The Report identified six general rules which inform many of the individual recommendations to be made to the financial services legal and regulatory framework. The general rules are:

  1. the law must be both applied and enforced;

  2. industry codes should be approved under statute and any breach of a key promise made to customers in the codes should be a breach of statute;

  3. no financial product should be ‘hawked’ to retail clients;

  4. intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary;

  5. exceptions to the ban on conflicted remuneration should be eliminated; and

  6. culture and governance practices (including remuneration arrangements), both in the industry generally and in individual entities, must focus on financial and non-financial risk.

The Report

Financial advisers

Advisers have an incentive to keep their clients in products with grandfathered commissions rather than advise them to move to better products. The Report states that there is no justification for maintaining grandfathering provisions, and therefore, recommends banning grandfathered commissions for financial advice and life insurance products, and repealing grandfathering provisions for conflicted remuneration.

Both mortgage brokers and financial advisers commonly receive a combination of upfront and trail commissions: upfront commissions when the product was sold, and trail commissions in subsequent years. Between the years 2008 and 2018, financial advisers providing advice at three out of four of AMP’s advice licensees obtained their highest source of revenue from ongoing or trail commissions.

Consumer lending

Mortgage brokers received a hard hit from the Royal Commission. This is particularly because despite brokers playing an advisory role, the Corporations Act 2001 (Cth) provisions about providing financial product advice to retail clients do not apply to giving advice about a residential home loan. Some of the key changes are:

  • Mortgage brokers, like financial advisers, should act in the best interests of the intending borrower.

  • Mortgage brokers should be subject to and regulated by the same laws as financial advisers to ensure consistent treatment of advisers.

  • The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

In addition, conflicts of interest between brokers and consumers will be improved by prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans and prohibiting lenders from paying other commissions to mortgage brokers.


In the superannuation sector, one overarching theme recurred: the difficulties that trustees faced in dealing with conflicts between duty and interest. The Report makes a number of recommendations that have capacity to disrupt the superannuation industry. These include:

  • Fund members entering the system should only have one default account, this strives to bring an end to fee-draining multiple accounts.

  • No deduction of advice fees from MySuper accounts and prohibits hawking of superannuation products.

  • Maintain exceptions to the general hawking prohibition, at least in respect of superannuation and insurance products.

Culture and supervision

Case studies have shown that conflicts between duty and interest can seldom be managed; self‑interest will almost always trump duty. The Report recommends that, where possible, conflicts of interest and conflicts between duty and interest should be removed. The interests of client, intermediary and provider of a product or service are not only different, they are opposed – ‘duty (to client) and (self) interest pull in opposite directions’.

The Report recommends that all financial services entities should, as often as reasonably possible, take steps to:

  • assess the entity’s culture and its governance;

  • identify any problems with that culture and governance;

  • deal with those problems; and

  • determine whether the changes it has made have been effective.

The Report calls for APRA to revise its prudential standards and guidance by building a supervisory program focused on building culture that will mitigate the risk of misconduct. APRA should assess the cultural drivers of misconduct in entities and encourage entities to give proper attention to sound management of conduct risk and improving entity governance.


There are also key changes recommended for the insurance industry, particularly the recommendations to:

  • include the handling and settlement of insurance claims, or potential insurance claims, in the definition of ‘financial service’.

  • unfair contract terms provisions in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act 1984 (Cth).

  • implement a Treasury-led working group to develop an industry-wide deferred sales model for the sale of any add-on insurance products.

  • impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products.


Too often, financial services entities that broke the law were not properly held to account. Commissioner Hayne notes that ‘misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation’. On the other hand, misconduct will be deterred if entities believe that misconduct will be detected, denounced and justly punished. Commissioner Hayne, commented that ‘wrongdoing is not denounced by issuing a media release’.

The Report recommends that both APRA and ASIC should be subject to a capability review at least every four years. A capability review should be undertaken for APRA as soon as is reasonably practicable. Responding to the Final Report, the Federal Government appointed a former ACCC chairman to lead a capability review of ARPA.

The effectiveness of financial industry regulators, ASIC and APRA was called into question. Commissioner Hayne consistently makes referrals to the regulators ASIC and APRA to take action over misconduct. The Report recommended a new oversight authority for APRA and ASIC, independent from the Government, to be established by legislation to assess the effectiveness of each regulator – essentially a regulator of the regulators.

ASIC responded stating that they have adopted a ‘why not litigate?' enforcement stance, initiated an Internal Enforcement Review and is enhancing their governance structures.

Our follow up article covering the Federal Government’s response to the Request will be published shortly.

If you have any questions please contact Hillary Ray or Richard Beissel.