Royal Commission Final Report Packs a Powerful Punch

The Final Report on Australia’s Royal Commission packs a swift and powerful punch which may well be felt for some time, says public policy specialist Matthew Chan.

Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has concluded with Commissioner Kenneth Hayne AC QC submitting his final report to the Federal Government on Friday (1 February) amid much speculation as to the nature and extent of his final recommendations on how the industry should be managed and regulated in future.

The report was in turn released to the Australian public at 4:20pm (AEDT) on Monday (4 February).

“The central task of the Commission has been to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations.”

– Royal Commission into Misconduct in the Banking, Superannuation
and Financial Services Industry Final Report

In the UK, Canada, New Zealand and Australia, royal commissions are a mechanism for formal public inquiry into substantial and controversial matters, similar to a commission of enquiry (or inquiry) in places like Hong Kong.

A difficult political birth

After considerable and heated political debate, the Royal Commission was established in late 2017, with targeted hearings over a twelve-month period offering at times harrowing insights into the shortcomings of financial services firms, the impact of these shortcomings on specific consumer groups, and the manner in which matters were dealt with by the industry’s regulators.

> ALSO READ: Australian Financial Sector Condemned in Hayne Interim Report (1 Oct 2018)

In the national media, during each set of hearings, column inches relayed troubling accounts of the worst offences to an increasingly concerned Australian public: fees for no service, reporting breaches, fraudulent documentation and so on.

> ALSO READ: Strategy, Management, Governance Lessons from Hayne Interim Report (9 Oct 2018)

The conduct identified and described in the Commission’s Interim Report, and the further conduct identified and described in this Report includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. Very often, the conduct has broken the law.

– Royal Commission into Misconduct in the Banking, Superannuation
and Financial Services Industry Final Report

In total, over ten thousand submissions were received and, over time, even initially sceptical government ministers were eventually forced to concede they may have been wrong in opposing the initial calls for such an enquiry.

On the Defensive

In the final report, Commissioner Hayne has outlined a total of 76 recommendations, covering banking services (17 recommendations), financial advisory services (10), the superannuation industry (9), and the insurance sector (15). He has 14 recommendations on the regulators themselves, and a total of 4 recommendations classed under a catch-all ‘other important steps.’

Finally, in what will likely have Australia’s corporate boards on the defensive, Hayne makes 7 further recommendations in relation to how the financial sector should better manage organisational culture, governance and both frontline and executive remuneration.

The federal government has agreed to act on all 76 recommendations.

In banking, the key recommendations include:
• Requiring mortgage brokers to act in the best interest of the borrower, rather than the bank;
• Borrowers paying fees, rather than lenders, to mortgage brokers for their services;
• Banning trail commissions; and
• Expanding BEAR (the Banking Executive Accountability Regime).

> ALSO READ: APRA Clarifies Accountability Expectations under BEAR in New Paper (18 Oct 2018)

Significantly, Hayne also referred 24 firms to ASIC (the Australian Securities and Investments Commission) and APRA (the Australian Prudential Regulation Authority) for possible criminal or civil action, including a number of major Australian banks.

Regulatory Regime

Apparent weaknesses in enforcement by regulators also became evident during Commission hearings, and to address this Hayne’s recommendations include:
• Changes to ASIC’s approach to enforcement, with an emphasis on court action;
• An independent oversight authority to oversee and evaluate APRA and ASIC;
• Greater coordination and information sharing between APRA and ASIC; and
• Capability reviews of the regulatory agencies every four years.

In a press statement coinciding with the release of the Commission’s final report, ASIC Chairman James Shipton has acknowledged the identification of his organisation’s enforcement culture as an area of concern by the Commission, and the need for change at the regulator, including adoption of a stronger ‘why not litigate?’ enforcement stance and improvements to the agency’s governance structures.

> ALSO READ: ASIC Officials Fear Excessive Focus on Litigation (21 Jan 2019)

Shipton also acknowledges referrals by Hayne to ASIC concerning possible breaches of financial services laws, promising to examine these as a matter of priority.

> ALSO READ: ASIC Will Use Every Power Available to Punish Dishonest Behaviour – Shipton (19 Oct 2018)

Systemic Observations

In summarising his findings, Commissioner Hayne outlines four critical observations underlying his overall analysis of the issues and problems identified over the course of the last 12 months’ hearings and deliberations:
1. Perverse connectivity between conduct and rewards skewing certain client outcomes;
2. Asymmetry of power and information between financial services entities and customers;
3. Conflicts between duty and personal interest in the case of financial intermediaries; and
4. High frequency of entities breaking the law but not being significantly held to account.

Indeed, Commissioner Hayne notes:

“In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers … 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. Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law.”

Finally, Hayne concludes that ‘choices must be made’:

“The arrangements of the past have allowed conduct of the kinds and extent described here and in the Interim Report of the Commission. The damage done by that conduct to individuals and to the overall health and reputation of the financial services industry has been large.”

In conclusion

Time will tell what the end result of Hayne’s 76 recommendations will look like in practice, with much potential for further heated political debate to determine how they are adopted and implemented. For observers in other jurisdictions watching this Royal Commission, there are lessons to be learned from Australia’s examination of its financial services sector and how these might be applicable in other Asia Pacific markets.

Many suggestions made by Hayne may well have currency in other locations, including his recommendations regarding culture, governance and the stance of regulators, especially where governments may be seeking in particular to prevent future crises of confidence in their countries’ financial industries at a time when the global business environment is in flux and less certain.

Companies and boards everywhere would also be well advised to study the Royal Commission’s proceedings as an instructive lesson in reputational damage.

Just as significant, however, is the precedent Commissioner Hayne has set with respect to his judicious use of targeted case studies to strategically illustrate the breadth and depth of problems and make an unarguable case for change within a relatively short period of time.

Indeed, through this carefully and deliberately constructed process, Hayne has packed a swift and powerful punch which may well be felt for some time.

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