Fundamental reform or business as usual? The real impact of the banking royal commission

by Abhik Sengupta

by Alex Peckman

The final report from the royal commission into misconduct in the banking, superannuation and financial services industry was handed down at the start of this month. While it shone dramatic light on a number of unsavoury practices – from mis-selling to charging the deceased – a lot of the problems were already well known to the industry and regulators, and in most cases being addressed – albeit at a glacial pace.
 

Markets were swift to react to the report, but not all players were impacted equally: big banks’ stocks soared and mortgage brokers reeled the day after the release. Both the Government and the Opposition said they would implement the 76 recommendations – and with an election due this year, changes should kick in thick and fast.
 
So what will this actually mean for the sector, and how should financial services organisations respond? Is it really business as usual as some pundits have predicted, or is this the wake-up call that will finally make the industry radically transform to become compliant, customer-centric and innovative?
 
What just happened?
 
A lot of the damage had already been done before the release – with financial institutions being very publicly dragged over the coals in the 12 months since the initial proceedings started, a number of high profile departures, and public embarrassment for many others. After such hype, the final report itself feels a little long on rhetoric and short on substance, but there are indeed some very real changes coming:

  • Most seriously, some senior executives in the big banks – may face criminal charges for their role in the fee-for-no-service scandals. But surprisingly, there will be no forced break ups of banks’ business model – vertical integration remains intact, as does bankers owning wealth management (for those who have not voluntarily divested already).
  • The powers of financial regulators have been strengthened. ASIC will be granted brand new legal powers to refer serious transgressions to the Federal Court.
  • Mortgage brokers copped a big hit. They’ll be forced to move from a commission-based model to a fee-based model, with a ban to be placed on the upfront and trailing commissions they receive from banks and other lenders. Importantly, the bill for their fees will need to be footed by the customer directly. If that wasn’t enough, mortgage brokers can also expect to be bound by a best interests duty to ensure they act in accordance with a borrower’s needs, financial situation and objectives when helping source a loan.
  • Financial planners also face some upheaval. They’ll need to provide greater transparency for fees they charge, and any advice they give will need to be signed off in writing, in person. Grandfathered commissions and commissions from life insurance might be forcibly ceased by 2020.
  • Car dealers and retailers may soon need credit licenses if they are to continue selling financing and loan options on in-store purchases. The current ‘point of sales exemption’ means that they defer responsible lending obligations to a third-party bank or lender who is offering the finance, although not directly involved in the sale.
  • Furthermore, some insurance companies and retail super funds will need to rethink their sales practices, given the introduction of anti-hawking legislation and a clamp down on cross-selling.
 
A fork in the road
 
In the face of such scrutiny and disruption, the common response would be to batten down the hatches and try to survive until the storm blows over. However, we see an opportunity industry-wide for these findings to spark innovation and to drive organisations to refine their core value propositions, resulting in an overall better offer and experience for customers. Here are two possible scenarios for key financial services players to consider.

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Big banks
 
The predictable approach:
 
It will be easy for the big four to sit back, breathe a sigh of relief, and settle down to a less complicated life of reduced competition from mortgage brokers and challenger banks.
 
In the face of greater scrutiny and strengthened regulation, the conventional approach would be to try to defend existing business models and double down on risk and compliance, even if that ultimately leads to the risk of a clunky customer experience. CBA has already stated they’re committing 64% of their investment to regulatory and compliance projects, and that’s going to remain elevated for some time. 
 
The road less travelled:
 
Strong compliance, customer-centricity and innovation need not be mutually exclusive. With fintech disruptors ever circling the waters of open banking and increasing customer expectations of value and experience, the worst thing banks can do is become complacent, stifle innovation through onerous compliance practices and look to defend the status quo.
 
Instead it is the perfect time to innovate around the customer experience. With vertical integration intact and greater ownership of the customer experience end to end, Banks can invest in data-driven customer solutions and seamless experience at the ‘moments that matter’, leading to greater engagement, retention, advocacy and needs fulfilment. 
 
Mortgage brokers
 
The predictable approach:
 
The stress of the final report could well trigger a fight or flight response for mortgage brokers. The obvious option would be for them to respond by fighting the new recommendations in the court of law and public opinion, in order to keep some semblance of their commissions-based model. They could also seek safety in numbers by banding together through market consolidation. If all that fails, a number could end up exiting the market altogether.

The road less travelled:
 
The only real way out of this existential crisis for mortgage brokers is through reinvention. Brokers have a golden opportunity to transform their current perception of being transactional, commission-driven middle-men to genuine, value-adding service providers. To do this, they’ll need to develop a new role as consumer advocates, a more sophisticated offering around credit advisory and solutioning and a well-articulated customer value proposition to earn the right to charge their customers directly. 
 
Retail super funds
 
The predictable approach:
 
As billions of dollars transfer from retail super to industry super, you’d be forgiven for thinking retail super funds could ‘shrink themselves to greatness’.  As the cash flows out from retail super funds, the temptation is to focus on operational efficiency while continuing to eke out a living within the old adviser-driven business model servicing a small fraction of affluent delegators, albeit with some of the conflicts and opacity reduced.

The road less travelled:
 
Retail funds need to recognise that the old intermediated models are no solution in a world with heightened consumer engagement, greater transparency and increased expectations of value and experience. Retail funds should now focus on simplifying their business model and embracing customer engagement, by providing segmented offers via multiple channels which uplift the overall experience – irrespective of the complexity of the customer’s need or their ability to pay. 
 
Life insurers
 
The predictable approach:
 
As three of the big four banks divest their life books to big global players, the great bancassurance experiment is officially over.  With a lot of direct insurance products and sales practices now proven to be questionable, it would seem reasonable for the big global players who are left in the market to focus on product-centric intermediated go-to-market models.

The road less travelled:

Instead of lurching back to the old world of product-based competition via intermediaries, life insurers could look to reignite the direct insurance model. By triangulating themselves with the rich veins of public and proprietary data they have access to across multiple markets, insurers could construct bespoke offers tailored to micro-segments, engage their customers more deeply via multiple channels and place a premium on retention – rather than striving for irrational competitions for the few customers that are on the move at any given point in time.
 
So what happens next?
 
While the aftershocks of the royal commission are sure to reverberate for some time, the industry has a narrow window of time in which to capitalise on the crisis and act on the mandate for change.  The change does not have to be reactive, negative or stifling. Instead, the opportunity is to start with a clean slate and create contemporary customer-centric business models that differentiate on insight and experience to drive true innovation.