Apart from consolidation in mortgage broking, and to a lesser extent, changes in life insurance sales, major changes to the structure or competitive landscape of the financial services industry are not expected following the implementation of the Royal Commission's recommendations regarding misconduct in the banking, superannuation, and financial services industry, said S&P Global Ratings yesterday.
"We expect the recommendations to strengthen Australian financial institutions' risk culture," S&P Global Ratings added.
The Royal Commission in its report released on 4 February highlighted a range of cultural and behavioural matters across the financial system. Changes implemented by the banks and insurers as a consequence--whether by themselves or due to the recommendations--should strengthen the risk culture, S&P Global Ratings said. Stronger risk management, in turn, should help offset pressures on bank credit profiles because of lower earnings due to more rigorous governance and regulation for financial institutions amid subdued credit growth.
The international rating agency said that furthermore, stronger governance, and sales and claims oversight for insurers should benefit the consumer, and ultimately enhance the industry's reputation.
S&P Global Ratings added: “We do not foresee a significant change in the stable industry structure, including the dominant market positions of the four major Australian banks or across the insurance sector. In addition, the insurance industry is well advanced in improving sales practices such as cold calls and add-on policies.”
Future financial sector policies should have reasonable certainty given that the Royal Commission's 76 recommendations appear to have broad bipartisan support. However, the implementation of these recommendations could be nuanced, particularly on mortgage broking or distribution of life insurance, S&P Global Ratings said.
Issues that were highlighted in the Royal Commission hearings were mainly lapses in governance and risk management by the financial sector, and gaps in effectiveness of regulation. Despite these lapses and gaps, the regulation, governance, risk appetite, and risk management within the Australian financial institutions sector remain strong by global standards, in S&P Global Ratings' view.
Australian financial institutions and regulators have been responding to the issues highlighted within the Royal Commission hearings over the past year.
Overall, S&P Global Ratings considers the credit implications of the Royal Commission on the sector to be grouped in three broad areas:
- Modest strengthening of regulation
- Restrictions and new regulations on mortgage broking
- Increased focus on governance, culture, and remuneration.