Australian banks enjoy financial soundness and are financially well-managed. One explanation for the widespread misconduct revealed at the Royal Commission is over-concentration on financial risk. Non-financial risk has been downplayed and has affected customers. Non-financial risk manifests in legal non-compliance, dishonest and misleading conduct, and unfair customer treatment. It is also seen in denying, and delaying customer dispute resolution and remediation. It is also obvious in underdevelopment or absence of policies for vulnerable or disadvantaged customers. The prevalence of customer harm has led to loss of trust and large remediation payments. Customer exits from some wealth businesses and loss of funds under management added to remediation payments, mean that non-financial risks are monetised as financial risks – even existential ones. Addressing non-financial risk is crucial because it involves both human cost and may threaten the financial soundness for which Australian banks have a deserved reputation. The Report addresses this non-financial risk as its central task.

Another cross-cutting principle of the Report is that “culture, governance and remuneration march together”: they reinforce each other, for better or worse. This makes the influence of variable and conflicted remuneration central to the explanation of bank failings. It also identifies a starting point for putting things right for customers and wider risk management. Get remuneration right, Hayne argues and much of governance, culture and conduct will follow. Boards and senior executives have primary responsibility both for misconduct identified and for using the remuneration, governance and culture levers to turn their institutions around.

Frontline staff remuneration and remuneration of intermediaries raise many of the same issues: non-financial risk management (including customer wellbeing), conflicts of interest and vertical integration. As well as governance and culture marching with remuneration, in Hayne’s view remuneration marches with conflicts of interest. The conflict between legal duties and self-interest is for Hayne mostly resolved in favour of self-interest. Conflicts are the immediate mechanism causing misconduct and poor management of non-financial risks. Accordingly, he makes recommendations throughout to ban conflicted arrangements in intermediary remuneration. He also limits the value of variable pay for frontline staff and senior executives. He does this by limiting the quantum of pay related to financial metrics such as sales, revenue or group performance. Avoiding conflicts of interest for intermediaries along with extending best interest duties and limiting variable pay, provided the justification for leaving vertical integration in place as a business model.

The Final Report places a lot of weight on application and enforcement of the law to meet the misconduct and failures of community expectations uncovered by the Commission. In a rule of law democratic society no one is above the law. Hayne places responsibility for application of and obedience to the law by banks and bankers squarely on bank boards and senior management. He places responsibility for enforcing the law on the regulators APRA and ASIC. ASIC in particular, being an enforcement regulator and not relying on suasion as prudential regulators do, is tasked with litigating enforcement and public denunciation where appropriate.

Understanding the purposes of financial regulation so there is clarity about the intent of rules and what is expected is fundamental. This improves application, obedience and enforcement. Hayne identifies six principles or purposes all of which are established, accepted and easily understood in their financial regulatory context: (i) obey the laws; (ii) do not mislead or deceived; (iii) act fairly; (iv) provide services that are fit for purpose; (v) deliver services with skill and reasonable care; and (vi) when acting for another, act in their best interest. He recommends the removal of different and special rules which govern financial sub-sectors. This is to promote financial consumer understanding of their rights, and to make application, compliance and enforcement easier. Where is the public interest Hayne asks, in having different rules for intermediaries which provide functionally similar economic and financial functions?

Using financial advising as an example, Hayne argues for sub-sectors of banking and financial services to put in place the structures and practices of professions. This is seen as a further measure, over and above the law, of proper conduct towards customers. The indicia of professionalism he encourages are improved education, ethical and conduct codes, banning conflicted remuneration and institutionalising professional disciplinary arrangements. True to his reliance on legal approaches Hayne recommends underpinning professional codes and discipline with statutory powers of enforcement. He argues for the extension of a best interests duty to mortgage brokers and like obligations for insurance brokers.

The recommendations should be implemented with further expert research and advice where needed. The changes should be implemented observing the principles of simplicity and connection to well-understood underlying purposes already mentioned.