Federal Election Fallout – What Can the Financial Services Expect to See (and Not See)

The Coalition Government’s “shock” Federal election win on 18 May has, aside from the pundits and papers questioning how all the polls got it so wrong for so long, sent many of us back to look at the Coalition Government’s policies and previous announcements concerning the financial services industry.

What We Can Expect to See – Regulator Enforcement Action

Commissioner Hayne in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) recommended new powers for ASIC and APRA, urging them to overhaul their culture and their approach, and slamming them for treating the banks like “clients”. Commissioner Hayne stated “[n]egotiation and persuasion, without enforcement, all too readily leads to the perception that compliance is voluntary. It is not.” The Commissioner also recommended a new oversight body to assess the performance of ASIC and APRA, and a capability review to occur every four years.

Both the Coalition Government and Labor Party committed to providing ASIC and APRA with more resources to undertake enforcement action. The Coalition allocated more than $550 million in the 2019-20 Budget to ASIC and APRA to “allow them to strengthen and intensify their approach to enforcement and take on expanded responsibilities to stamp out misconduct in our financial sector.”

What we expect to see (and are already seeing):

  • ASIC’s “why not litigate” approach to compliance failures, ending its widespread use of enforceable undertakings and infringement notices in matters involving evaluative judgement or large corporations
  • ASIC and APRA’s focus for enforcement activity on breach reporting, senior management accountability and culture, remuneration and governance
  • increased monitoring and supervision, surveillance and investigations and requests for information by ASIC and APRA
  • no return to their former ways with ASIC and APRA to be subject to oversight by a new body.

What We Will Not See – No End to Trailing Commissions (for at least three years)

In the Banking Royal Commission Final Report Commissioner Hayne recommended trail commissions for new loans arranged by brokers and paid by lenders be axed and replaced with an upfront broker fee paid by the borrower, not the lender.

Labor went to the election pledging to implement part of Commissioner Hayne’s recommendation; planning to abolish trail commissions for new loans from 1 July 2020 if it won government and allow for brokers to charge an upfront fee to the lender (capped at 1.1% of the loan amount drawn down).

The Coalition Government, after first supporting Commissioner Hayne’s recommendation, changed their position after consulting with the mortgage broking industry and small lenders, and announced that it will not prohibit trail commissions, but would rather ask the Council of Financial Regulators and the ACCC to review the operation of trail commissions and the Commissioner’s recommendation in three years’ time.

What We Have to Wait For – What Verification of Borrower Spending is Required to Comply with Responsible Lending

ASIC and Westpac are still thrashing it out before Justice Nye Perram in the Federal Court, with Westpac defending ASIC’s allegation that it breached the responsible lending laws, a whopping 261,987 times. ASIC’s submissions revolve essentially around Westpac using the Henderson Poverty Index (HEM) to estimate potential borrowers’ living expenses. The word “poverty” in its title clearly indicates ASIC’s issue, with their argument being that lenders should take the borrower’s income and deduct their actual expenses to form a view as to whether the loan is “not unsuitable”.

Commissioner Hayne paid a lot of attention to the conduct of lenders in fulfilling their responsible lending obligations in the Banking Royal Commission Final Report. The Commissioner’s firm view was that verification of borrower spending, required to comply with the responsible lending obligations, necessitated more than simply using an index and required inquiries and verifications. The Commissioner was prevented from going further as the ASIC and Westpac case had already commenced.

Justice Perram’s decision will be closely watched by industry as the Federal Court determines what lenders need to do to meet this responsible lending requirement. The decision will impact all lenders. With the Treasurer’s statement on Tuesday 22 May that banks have an “economic and social responsibility” to ensure “credit continues to flow to the economy, both to households and businesses”, Justice Perram’s decision will undoubtedly be closely watched by the re-elected government.