On September 28, the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission) was tabled in the Australian Parliament. The Letters Patent that the Australian Governor-General issued provided the Commission, which was established in December 2017, with terms of reference that included ten primary responsibilities:
- “[w]hether any conduct by financial services entities (including by directors, officers or employees of, or by anyone acting on behalf of, those entities) might have amounted to misconduct and, if so, whether the question of criminal or other legal proceedings should be referred to the relevant Commonwealth, State or Territory agency;”
- “[w]hether any conduct, practices, behaviour or business activities by financial services entities fall below community standards and expectations;”
- “[w]hether the use by financial services entities of superannuation members’ retirement savings, for any purpose, does not meet community standards and expectations or is otherwise not in the best interests of those members;”
- “[w]hether any findings in respect of the matters mentioned in paragraphs (a), (b) and (c):
- “(i) are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the relevant industry or relevant subsector; or
- “(ii) result from other practices, including risk management, recruitment and remuneration practices, of a financial services entity, or in the relevant industry or relevant subsector;”
- “the effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by financial services entities;”
- “the adequacy of:
- “(i) existing laws and policies of the Commonwealth (taking into account law reforms announced by the Commonwealth Government) relating to the provision of banking, superannuation and financial services; and
- (ii) the internal systems of financial services entities; and
- (iii) forms of industry self-regulation, including industry codes of conduct;
“to identify, regulate and address misconduct in the relevant industry, to meet community standards and expectations and to provide appropriate redress to consumers;”
- “the effectiveness and ability of regulators of financial services entities to identify and address misconduct by those entities;”
- “whether any further changes to any of the following are necessary to minimise the likelihood of misconduct by financial services entities in future (taking into account any law reforms announced by the Commonwealth Government):
- the legal framework;
- practices within financial services entities;
- the financial regulators;”
- “any matter that has occurred or is occurring overseas, to the extent the matter is relevant to a matter mentioned in paragraphs (a) to (h);” and
- “any matter reasonably incidental to a matter mentioned in paragraphs (a) to (i).”
The Letters Patent also directed the Commission “to have regard to the implications of any changes to laws, that you propose to recommend, for the economy generally, for access to and the cost of financial services for consumers, for competition in the financial sector and for financial system stability,” and authorized it “to have regard to comparable international experience, practices and reforms.”
In view of the breadth of the terms of reference, it is not surprising that the Interim Report is a voluminous 347 pages. The Commission summarized the Interim Report in exceedingly cursory terms:
- Overview: So far, the Commission’s work “has shown conduct by financial services entities that has brought public attention and condemnation. Some conduct was already known to regulators and the public generally; some was not.”
- Why Did It Happen?: Too often, selling “became the sole focus of attention” for banks and all financial services entities, and “[f]rom the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.” Moreover, “[w]hen misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court.”
- What Can Be Done to Prevent Recurrence of the Conduct?: The Commission noted that “entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements,” and that “[t]here have been changes in industry structure and industry remuneration.” It also posed a series of questions about possible legal changes:
- “Should the existing law be administered or enforced differently? Is different enforcement what is needed to have entities apply basic standards of fairness and honesty: by obeying the law; not misleading or deceiving; acting fairly; providing services that are fit for purpose; delivering services with reasonable care and skill; and, when acting for another, acting in the best interests of that other? The basic ideas are very simple. Should the law be simplified to reflect those ideas better?”
The full text of the Interim Report, however, contains extensive details about the magnitude and prevalence of misconduct in Australian financial services. They include information about (1) conduct that five leading Australian financial institutions – AMP, ANZ, Commonwealth Bank (CBA), National Australia Bank (NAB), and Westpac – acknowledged with regard to consumer lending, financial advice, small and medium enterprises, agricultural lending, and remote communities, and (2) regulation and the regulators, with specific reference to the Australian Securities & Investments Commission (ASIC). With regard to each of those topics, the Interim Report also sets out a series of questions for further consideration.
Note: Although the Letters Patent generally referred to conditions in the banking industry in anodyne terms, what prompted the Commission’s creation was “a decade of scandals that have rocked the [banking and financial] sector,” including leading Australian institutions, as well as more than AU$1 billion in penalties and compensation that Australian banks have paid since the 2008 financial crisis. As highly profitable banks in Australia have become deeply unpopular, the Commission’s ultimate findings and recommendations may play a vital role in setting the industry on a path, however uncomfortable it may be, to reform and recovery of public trust.
The Commission’s Interim Report provides significant substantive content about reported misconduct regarding banking, superannuation, and financial services, without seeking to provide definitive answers and recommendations. In general, that means that interested parties have ample time to provide additional information and recommendations to the Commission. The Commission will be scheduling additional rounds of hearings as its work progresses, and its final report is scheduled to be presented to the Australian Governor-General on February 1, 2019.
Those interested in submitting public comments on the Interim Report, however, must do so no later than 5:00 pm (Melbourne time) on Friday, October 26. Public submissions on policy issues relating to the insurance industry must be made by 12:00 noon (Melbourne time) on Thursday, October 25.
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