PC calls for ‘integrity officer’ to monitor commission payments

Despite noting that it “has not found any competition issues in either mortgage or wealth management markets that are clearly associated with integration”, the PC claimed that poor consumer outcomes “may be compounded at times by integration, but are more likely associated with poor transparency and adverse remuneration incentives”.

The PC has therefore called for the government to mandate financial entities, beginning with authorised deposit-taking institutions (ADIs), to appoint a PIO that would report regularly to the Australian Sectaries and Investments Commission (ASIC) on remuneration structures applied by financial institutions, including to “contracted third parties”, while also reporting “directly and indecently” to an entities’ board when a breach is identified.

“The position would carry the obligation to advise an entity’s board of a potential breach of commission standards on an ongoing basis, as well as an obligation to inform the regulator if they consider the standards are not being observed,” the PC said.

“Similarly, the PIO should report to the regulator annually on its entity’s performance against industry benchmarks in order for the regulator to also collect information on commissions paid on an ongoing basis.”

The PC added that if financial entities are found to have breached commission standards, they would be subject to penalties and would be held liable for such breaches, and suggested that penalties “may be monetary, or include invoking ASIC’s product intervention powers” .

Further, the PC said that the PIO role “could easily be extended beyond ADIs if they were deemed necessary”, and stated that “it may be worth considering the wider application of the PIO concept — for example, to non-ADI financial entities that persist in paying commissions”.

However, the PC noted that the PIO would target the “source of the payments”, claiming that mortgage aggregators “need not appoint such an officer”, but that “commissions paid to aggregators, brokers, or referring agents should all be reported upon”.

Additionally, the PC stated that if an entity fails to appoint a PIO an ongoing basis, it should incur a “substantial penalty”, which may include daily fines payable by the entity.

“The company’s board would be obliged under the specified licence condition to ensure the PIO is appointed, has their independence protected, is sufficiently resourced and that their reporting is carried out,” the PC continued.

ASIC to embed “corporate cops” in big four and AMP

The PC’s call for a PIO coincides with the federal government’s announcement that it will provide ASIC with a further $70 million to combat misconduct in the financial services sector, including $8 million to embed staff into the big four banks and AMP.

In a joint announcement yesterday (7 August), Treasurer Scott Morrison and Minister for Revenue and Financial Services Kelly O’Dwyer announced that the government would be pumping additional resources into ASIC to “ensure the corporate regulator has the resources and powers it needs to combat misconduct in the financial services industry and across all corporations for the protection of Australian consumers”.

The additional funding follows a decision by ASIC’s new chairman, James Shipton, to refocus ASIC’s strategic direction on proactive enforcement and increase onsite supervisory approaches and follows on from heightened scrutiny of how the sector runs, given the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Notably, the $70 million package will include $8 million for ASIC to embed dedicated staff, or as Mr Morrison described them “cops on the beat”, within the big four banks (ANZ, CBA, NAB and Westpac) and AMP to “monitor governance and compliance actions”.

Following the announcement, Treasurer Morrison also commented on the PC’s proposed PIO role. The Treasurer claimed that such a role already exists but argued that personnel should be endowed with greater powers to report breaches when an entity’s board is not receptive to feedback.

“[The PC] suggested a [principal] integrity officer — [I] think that idea has merit, too. They’re already people in the banks who report directly to the board, but what happens if the board doesn't listen to them?” Mr Morrison said.

“[It’s] not about putting an extra person in from what the Productivity Commission is saying. There’s already someone there who is doing that, you just need to give them the powers to pick up the phone to the regulators. But this is about having someone that is part of the process.”

[Related: Industry reeling from PC trail stance but calls for calm]