Friday saw the completion of the sixth round of hearings in the banking Royal Commission, which focused on insurance. After the last two weeks of hearings, the commission found multiple insurers are likely to have engaged in misconduct over claims handling and to have breached their duty to act in utmost good faith. So are the “smartest guys in the room” running the show? And what will be the ultimate outcome of the commission?
More Dodgy Brothers Techniques and Embarrassment For Insurers
Many individual case studies were heard that singled out harrowing insurance horror stories, but more broadly, life insurer ClearView admitted to 303,000 criminal breaches of the law because of its sale of insurance via cold call calling centres. CBA, AMP and Allianz may have committed criminal offences in their treatment of insurance customers. Three big insurers were also heard to have fallen short of community standards: Comminsure for using outdated medical definitions in their insurance policies, TAL for stalking a nurse who was trying to claim a policy and AMP for charging insurance premiums to people they knew were already dead. Suncorp was heard to have “systemic” problems in its claims and dispute handling processes. There were many awkward moments during the two weeks, particularly listening to recordings of pushy sales calls and emotional witness statements, however you might not have thought the CEO of the FSC would add to the embarrassment.
Loane Her A Hand
The FSC is the peak lobbying and policy development body for the life insurance and for-profit superannuation industries and has been opponent of Future of Financial Advice reforms. In a somewhat awkward stint in the dock, Financial Services Council CEO Sally Loane was unable to answer general questions about the industry and recent developments. Ms Loane said she did not know whether the FSC supported FOFA, was unaware of a change to UK laws that made it harder for insurers to deny claims and doesn't know why the FSC lobbied Treasury over similar laws here.
In response to a question about the code of conduct Loane said she didn't know and added "As I said, I'm CEO. I have a lot of people on my staff".
Loane was asked about commission structures used by life insurance companies. Unfortunately she was also unable to explain the purpose of the $6 billion in commissions the life insurance industry pays to financial advisers. The testimony reads incredulously:
“I really couldn’t say with certainty,”
“These are commissions paid to advisers for essentially selling their products.”
When counsel assisting put it to her that “the whole point of paying commissions to financial advisers is to influence the advice they give” Loane responded “It would certainly mean they are paying for their products to be sold, yes,”
The commission's interim report for the first four rounds, which covered consumer and SME lending, regional and indigenous issues and financial advice is due out on Friday September 28th. The seventh round of public hearings will focus on policy questions arising from the first six rounds, including superannuation and insurance, and will be held from November 19th - 30th.
These upcoming dates will be crucial to the ultimate outcome of the commission. Whether the focus will be on retribution against the industry in the form of harsher punishments, expanded regulation and/or even stricter interpretations and applications of the law by the regulators APRA and ASIC.
The two regulatory bodies came under harsh criticism for their past enforcement shortcomings from the new Treasurer Josh Frydenberg last week. The Treasurer said “the public has a right to know why such gross misconduct (as uncovered by the commission) has not been dealt with by the heaviest penalties possible."
The government has already announced that ASIC will be given new powers to deal with misconduct, including criminal penalties of up to 10 years' imprisonment for individuals and larger corporate fines. Something tangible needs to be done if the trust of the public is to be regained. Is that more fines? ASIC has recouped $1.8 billion in compensation and remediation for investors and consumers from the financial sector since July 2011. This is an enormous amount of money – though potentially not that much compared to the annual profits of the big banks who have been at the centre of many scandals.
Comments From The Supercoach
Speaking to Fairfax media, former head of the ACCC Graeme Samuel said he was shocked at the extent of misconduct “endemic” in Australia’s financial services sector: “I didn’t think it was as bad as what has been revealed” and that the Hayne commission has delivered a “wake up call” to corporate Australia, which must take ultimate responsibility for changing its toxic culture of “complacency”. The "Smartest Guys In The Room" suddenly springs to mind. "The fundamental lesson to boards, to senior managers and to middle managers is you might be next to have to sit before a Senate inquiry or royal commission to answer questions under oath.” Samuel had harsh criticism of the regulators as well, “the regulators have got to be totally feared, for their independence, their rigor, their commitment and their intolerance to bad behaviour, and they have not been feared for that – neither ASIC nor APRA.”
Samuel also had some advice for banking executives who wanted to know how they could stop the “relentless public mantra of “banks are bastards’”. That advice was…
“Stop being bastards”
The Royal Commission would indicate similar advice would be worth taking across large sections of the finance industry.