A new financial services landscape

Post-Royal Commission in a COVID-19 world

For the financial services sector, 2020 was to be the year of rebuilding after the royal commission reckoning of 2018-2019. But with 2020 presenting circumstances that were previously unimaginable, the sector – like the entire Australian economy – has a whole new set of challenges to face…

 

As 2020 ticks on, the financial services industry is grappling with new challenges presented by the COVID-19 pandemic and the subsequent economic downturn. The industry's role pivoted almost overnight as the community and government required immediate support to manage COVID-19's impacts. This role will continue as Australia faces its first recession in 29 years.

However, amongst these new, immediate challenges, the fundamental issues raised by the Financial Services Royal Commission (FSRC) remain a critical priority for the banking, wealth management and insurance sectors. As the clock counts down to January, when several key pieces of legislation will be introduced, organisations need to put the building blocks in place now to ensure they are ready for the challenges that 2021 will present.

The intersection of these three components – the implementation of the FSRC, the immediate response to COVID-19 and preparing for the long term downturn – is shaping the financial services industry's activity.

Implementing the FSRC recommendations

In the time since the FSRC report was released, the financial services industry has undergone its biggest change in living memory. Three changes have been particularly significant.

The industry restructured and its three sectors separated

2019 saw the death of bancassurance, with banks divesting or announcing the divestiture of their life and general insurance businesses and wealth insurance businesses. The industry is well on its way to reverting back to the three distinct sectors it had before – banking, wealth management (including superannuation) and insurance.

The regulators were more litigious and more aggressive

APRA and ASIC increased their resources dedicated to legal action and enforcement. 

The FSRC made 13 referrals to ASIC, of which two are the subject of civil penalty litigation, one is being considered by CDPP for potential criminal action, seven remain under investigation and three have been concluded with no further action being taken.

Regulators have also been asking for more information and data from organisations. ASIC spent more time on premises and required more information, APRA warned private health insurers that they will be forced to merge if they cannot demonstrate a sustainable business and superfund returns were under intense scrutiny.

There was a new approach to accountability in all its forms

A significant focus of activity has been on making key individuals more accountable, and eliminating ambiguity around who is responsible for what actions. This is illustrated in the form of the Banking Executive Accountability Regime (BEAR), which is already proving to be effective at creating transparency and holding individuals personally accountable. The Financial Accountability Regime proposes to extend BEAR-like accountability requirements to other APRA-regulated entities.

Shareholders are also demanding action. With 54 class actions in FY19, more than double those in the two years since FY17, Australia has become the second most active country for class actions after the US. However, proposed new rules which would require funder-backed class actions to be conducted as Managed Investment Schemes, if approved, could see a dramatic decline in funded class actions.

A revised roadmap to regulation

In August 2019, the government released a roadmap for implementing recommendations over the next several years. This was followed in January 2020 by the release of draft legislation to implement 22 recommendations and two additional commitments. The proposed start date for most of the measures was 1 July 2020. In April though, the government delayed the implementation of new regulation by six months so the industry had space to handle some of the pressing concerns that COVID-19 presented.

Part 1 Road to implementation

Recommendations and other measures that are already in place

See reforms

  • New Regulatory Guidance on Dispute Resolution standards
  • Civil penalties for breach of covenants and like obligations
  • Extend legislation for the product intervention power and design and distribution obligations to additional products

Part 1 Road to implementation

Recommendations scheduled to be implemented in the next 6-12 months

See reforms

  • Enforceable code provisions for industry codes of conduct
  • Annual renewal and payment for financial advice
  • Disclosure of lack of independence of financial advisers
  • Mortgage broker reforms
  • Product design and distribution obligations scheme
  • Reference checking and information sharing for mortgage brokers
  • Reference checking and information sharing for financial advisers
  • No deducting advice fees from MySuper accounts
  • Limitations on deducting advice fees from choice superannuation accounts
  • No hawking of superannuation products
  • No hawking of insurance products
  • Deferred sales model for add-on insurance

Part 1 Road to implementation

Recommendations that are currently on hold/have no confirmed commencement date

See reforms

  • Extending the BEAR to all APRA-regulated financial services institutions
  • Joint administration of BEAR by ASIC and APRA
  • New disciplinary system for financial advisers
  • Breach reporting by financial service licensees and credit licensees
  • ASIC as conduct regulator for superannuation
  • Licensee obligations to report compliance concerns
  • Statutory obligation for APRA and ASIC to co-operate and share information
  • A new oversight authority for APRA and ASIC
  • Improving ASIC’s Board meeting procedures
  • Implementing the ASIC Enforcement Review Taskforce’s recommendations to improve the breach reporting regime
  • Additional commitment: Implementing the ASIC Enforcement Review Taskforce’s directions power recommendations

Considering the short term impacts of COVID-19 on financial services

The COVID-19 pandemic has rapidly developed into the biggest economic crisis in living memory, causing the equity market to crash, business closures, job losses, a lockdown of society, and for many, significant decline in earnings and an erosion of their savings. In many ways, it has accelerated some of the issues and concerns already on the financial services industry's agenda.

The financial services industry has been required to step up and play an important role by helping customers and others deal with the economic fallout. Through means such as government guarantees for SME lenders and exemptions from responsible lending obligations, the industry has been able to play the role of 'crisis shock absorbers'. This situation is helped by having built up strong capital buffers and healthy liquidity positions mandated by APRA following the recommendations of the Murray Financial System Inquiry back in 2014.

This scenario has allowed the industry to demonstrate much faster than anticipated that it has already addressed much of the criticism levelled at it during the FSRC about its approach to customers and the community.

The move away from face-to-face transactions has also fast tracked the need for increased digitisation, which was also raised in the FSRC's findings.

COVID-19's impacts on superannuation and insurance

The superannuation and insurance sectors are also seeing significant impacts. Individuals can now access their superannuation savings early to combat the impact of COVID-19, which has taken a sizeable bite out of their superannuation savings – so far, over $42 billion in total.

Likewise, the insurance sector – still reeling from Australia's bushfire crisis – is facing a blow through increased payments, less appetite for spending and marrying up important community expectations with a sustainable pricing model.

Looking further down the road for the financial services industry

As the industry looks towards 2021 and beyond, the flow-on effects of recent developments will become apparent. For example, the implementation of new regulation will require new systems, personnel, equipment and IT.

Organisations will be exploring their approach to risk, considering both non-financial risk and the changed circumstances they face.

Investment trends will change. We expect to see ongoing M&A activity as banks continue to shed non-core businesses. We also expect to see some consolidation within the wealth management industry. Inevitably, private equity players will also look for opportunities in the current challenged environment.

Data and technology will hold the key to operationalising many of the FSRC recommendations, including enhancing transparency, enabling a more customer-centric approach and facilitating data sharing. They will also enable financial services institutions to meet the growing competitive challenges posed by new payment systems, a growing fintech market and the introduction of Open Banking.

However, with increased unemployment and budgeting measures being put into place, organisations may find it hard to balance new digital needs and the need to cut costs more generally.

Delving deeper into banking, superannuation and insurance

There are a number of steps the industry can take now to face future challenges and opportunities head on. In this series, we explore the trends, our predictions and our recommendations for the banking, superannuation and insurance sectors.

Contact

Rahoul Chowdry*

Banking Sector Leader

An extensive career in the professional services industry has enabled me to build a reputation as a leading adviser to major banks and financial institutions in Australia and Canada.

 

To join our financial services mailing list, please subscribe below.