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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance, and economics. I bring it all to you, every week.

This is episode number two in our series for 2019 and today’s date is Friday, February 8.

First, I talk to Steve Layton, Australia’s forefather of furniture, Steve Layton, has his sights set on the reshaping the sofa industry. Through his innovative new co-venture spanning Australia, Italy, and China, he’s making Italian luxe furniture available to the many, by delivering top-quality, heritage-rich Italian sofas, for one-third of the usual price through his new venture Sofa Brands.

And then I talk to AMP chief economist Shane Oliver about what market trends we should be watching out for in 2019.

But first, let’s talk to Steve Layton.

So what’s happening in the news?

Australia’s financial industry faces tougher regulation and more scrutiny of pay and culture after the government accepted key recommendations from a yearlong inquiry into decades of scandals and misconduct.

Commissioner Kenneth Hayne’s final report and the Government’s support for all 76 recommendations leaves some parts of the financial sector at risk of being effectively legislated out of existence.

In 76 recommendations, Commissioner Kenneth Hayne urges the securities regulator to consider court action as a first option. But in a win for the banks, he stops short of calling for them to be forcibly broken up to stop them from offering financial advice and wealth management. That’s good news for the likes of AMP and IOOF.

Mr. Hayne’s report was scathing of a sales culture that resulted in poor customer outcomes and recommended dramatic changes to the payment of mortgage brokers and financial planners that would see many leave the industry, as well as a major overhaul of insurance sales practices, especially for funeral cover. The commissioner also referred several institutions to the corporate regulator for possible criminal charges around the “fees for no service” scandal but declined to name names of individuals or companies that might face prosecution.

“Providing a service to customers was relegated to second place. Sales became all important,” the commissioner lamented. “Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards.”

The report is being released into a febrile political climate, with elections expected in May. Treasurer Josh Frydenberg has moved quickly to take the initiative – saying he will act on all 76 recommendations. That steals much of the opposition Labor party’s thunder.

Frydenberg’s opposite number, Chris Bowen, has been critical of the government for not holding the banking sector to account and had already said he’d adopt Hayne’s recommendations in full. Labor is odds on favorite to win the elections and return to the office for the first time since 2013. A key area for change is conflicted remuneration — that is where financial professionals are paid commissions for selling clients products, even though they may not be in the clients’ best interests. To that end, Mr. Hayne recommended first a ban on trailing commissions to mortgage brokers.

Next, he wants a ban on banks paying any commissions to brokers, as well as an obligation for brokers to act in their clients’ best interests, to be rolled out within two to three years. But with more than half of all home loans now written through brokers and many smaller financial institutions relying on them for almost all their loan origination, the Government has adopted a watered-down version of this recommendation.

While it proposed brokers be subject to a best-interests duty and for trailing commissions and “other inappropriate forms of lender-paid commissions” to be banned from July 1, 2020, it is planning for a review in 2023 about whether upfront commissions should be removed and brokers moved to a “borrower pays” system. It has also stopped short of adopting a user pays recommendation where borrowers, not lenders, should pay mortgage brokers a fee for acting in connection with home lending.

Banking industry codes of conduct will be expanded to cover more financial service providers, and ASIC would be given a greater role in approving and enforcing the codes. Remuneration for bank and lending staff would be overhauled, and APRA-regulated institutions would be required to change their bonus and remuneration structures to “encourage sound management of non-financial risks, and to reduce the risk of misconduct”.

Boards would be required to regularly assess the effectiveness of their remuneration systems and set limits on the use of financial metrics for long-term bonuses. Financial advisers would be required to tell all retail customers “simply and concisely why the adviser is not independent, impartial and unbiased”. Providers of financial advice would be required to investigate misconduct where it is detected, before advising and remediating all those affected as soon as possible.

A single, centralized disciplinary body would be established for advisers and all financial advisers would be required to register. Providers of financial advice would be compelled to report serious misdeeds. Hayne said charging customers for financial advice that was never provided was motivated simply by “greed: greed by licensees, and greed by advisers”.

Individuals can be prosecuted, and the offenses attract possible jail terms of 10 years.

Hayne has recommended significant changes to prevent banks from charging fees for no service. Banks would be required to get consent from its customer each year to charge them fees for services, and record in written form what those services are. Banks will better take into account the needs of customers in remote areas and those without English language skills, while a national mediation scheme will be set up to help farmers struggling to pay back loans.

Hayne recommended 24 cases of misconduct be referred to the financial regulators for consideration of civil or criminal action. The referrals involve almost all of the major banks except Westpac. ASIC says it has “prioritized” the cases, but would not comment in further detail.

Hayne also revealed he wrote to the corporate regulator late last year to invite them to “consider whether criminal or other legal proceedings” should be taken against unnamed banks involved in the fees-for-no-service scandal, in which customers were knowingly charged for financial advice they never received.

AMP, ANZ, CBA, NAB and Westpac are already expected to pay $850m in remediation over the scandal. He thinks the industry needs a complete overhaul. No surprise there – the interim report pointed to that late last year. He has identified “six norms of conduct”

  • The law must be applied and its application enforced
  • Industry codes should be approved under a statute and breach of key promises made to customers in the codes should be a breach of statute
  • No financial product should be ‘hawked’ to retail clients
  • Intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary
  • Exceptions to the ban on conflicted renumeration should be eliminated
  • Culture and government practices (including renumeration arrangements both in the industry generally and in individuals entities, must focus on non-financial risk, as well as financial risk

The final report of the commission has also recommended a regulator of the regulators, urging the government to set up a new body that will track and assess the performance of the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. The body would report to the minister biennially.

The Australian Securities and Investment Commission gets a particularly strong knuckle rap, for its enforcement activities. Or, more accurately, its reluctance in using its enforcement powers.  Hayne flagged the potential for ASIC’s role to be limited to one of investigation and referral, leaving court action to a new and separate “specialist civil enforcement agency”. He stopped short of recommending such a body, and the Coalition has already ruled it out.

Commissioner Hayne has also recommended ASIC’s role in relation to the regulation of superannuation be clarified to make it clear it is responsible for enforcing breaches of the Superannuation Industry (Supervision) Act after finding that neither financial regulator was enforcing the act properly. Both organizations will be subject to four-year reviews to assess each agencies capabilities.

The recently created customer-bank dispute resolution body, the Australian Financial Complaints Authority, has also been recommended to have new powers to publicly publish the remediation activities of the banks. ASIC has also been recommended to rely far less on its softer powers including doing away with its preference for reaching negotiated and agreed outcomes with the banks through infringement notices or enforceable undertakings.

And it might be time to start buying banks again. Australia’s big four banks have gained more than $20 billion in value after relieved investors welcomed the Kenneth Hayne’s royal commission’s recommendations as the threat of forced breakups and the demand for tighter lending that threatened to crush profits didn’t eventuate..

They drove the financial sector to what looks like its best day in a decade. Shares in Commonwealth Bank, ANZ, NAB and Westpac all gained more than five per cent on Tuesday – with Westpac rising by as much as 8.08 per cent – after Commissioner Hayne slammed their culture but stopped short of recommending the big banks be dismantled.

However, ASX-listed mortgage brokers Mortgage Choice and Australian Finance Group have been smashed as they will be subjected to a “best interests” duty and the government said it will move to ban trailing commissions from July 2020.

The RBA kept its cash rate on hold at 1.5 per cent, a move widely expected by the market but it was less confident about Australia’s economic outlook, flagging downgrades to its GDP growth forecasts and warning that “downside risks have increased”. Not surprisingly, commentators are saying the RBA will cut interest rates later this year after the election.

Retailers had their worst Christmas with Australia’s retail sales falling heavily in December, rounding off what was another weak quarter of spending at the shops. According to the Australian Bureau of Statistics (ABS), retail turnover tumbled by 0.4% after seasonal adjustments, missing expectations for an unchanged reading from a month earlier.

Figures from the Federal Chamber of Automotive Industries also point to the sharp slowdown in the economy with almost 82,000 cars sold in January, a 7.4 percent drop on the same month last year. Over the past six months, sales have edged down by 7 per cent compared to the same six month period in 2017.

And in another bad sign for Australia’s housing market, building approvals have tanked falling of 8.4%. Approvals were 23% lower than a year ago.  The number of dwelling approvals in the three months to December is down 11% on the September quarter and 24% in the same quarter a year ago. A very sharp decline in residential building activity looks set for 2019, notwithstanding the large amount of work yet to be done. The value of non-residential approvals was also down sharply in the month, though was only off 4.1% for the quarter. Still, non-residential approvals for the quarter were 15.2% below a year ago.

ANZ Job Ads fell 1.7% m/m in January and were 3.7% below the January 2018 level. This is the first annual decline since April 2015. 

One of Queensland’s biggest coal export terminals, Abbot Point, has been closed due to the Townsville floods with concerns the monsoon-like conditions will move further south and affect coal production in the Bowen Basin. With heavy rain still bucketing down on the North Queensland capital, the Ross River Dam reached 224.5 percent capacity, with the local council continuing to release overflow water to avoid a dam collapse. Abbot Point coal terminal, south of Townsville near Bowen, has been shut, with heavy rain and winds making it impossible to export coal to waiting for ships off the coast. The Insurance Council of Australia is expecting the natural disaster will result in claims that run into the tens of millions of dollars.

The Commonwealth Bank has reported a 6 percent fall in its net profit, hit by the costs associated with fixing historic misconduct issues and tighter margins due to competition and rising costs. First-half profit came in at $4.6 billion, down from $4.9 billion in the corresponding period last year. Cash profit — the bank’s preferred measure that strips out one-off gains and losses — edged up 1.7 percent to $4.68 billion, with higher sales volumes of loans offset by lower margins. The result was slightly below market expectations.

Insurer IAG said its net profit fell 9.3 percent to $500 million in the six months ended December 31 from $551 million in the year-earlier period. The insurer said it was cutting its interim dividend to 12¢ per share. Profit before income tax from continuing operations plummeted 45 percent to $441 million from $789 million in the year-earlier period

Boral has warned on annual profits Monday, hurt by heavy rain in the US and along Australia’s east coast while also citing delays to major projects at home. Boral said it now expects annual earnings before interest, tax, depreciation, and amortization — or EBITDA — from its Australian operations in the year through June to be broadly similar to the 2018 fiscal year. That forecast, which excludes property profits, is down from prior guidance for growth in the high single digits.

And that’s it for this week.

And next week, I have a terrific interview with Adam Brimo, the co-founder of online social learning platform, OpenLearning.  OpenLearning’s unique social and interactive approach to learning has been adopted with great success by leading institutions and government bodies around the world.  OpenLearning has had significant international traction thanks to its innovative model of online learning that is focused on student engagement and fostering vibrant learning communities in courses. OpenLearning currently supports over 1,500,000 students across 5,000 courses, with thousands more joining every week.

I’ll be talking to economist Jonathan Boymal about what’s happening in Australia’s housing market, and how it’s affecting the economy.

And of course, I’ll be bringing you all the week’s news. In the meantime, you can find me on Twitter at talkingbizz, on Facebook, and on LinkedIn. And if you want, leave a comment. Wishing you all a great week, take care, be good and looking forward to bringing you Talking Business next week.