Shaping the future with confidence
Your business post the Financial Services Royal Commission
The publication of the Royal Commission's final report marks one of the most significant events in financial services since the deregulation of the Australian financial system in the 1980s. The implications will be wide-ranging.
Banks and financial institutions will enter a new era characterised by unprecedented scrutiny and new expectations. Striking the right balance between incentives, culture and processes will be key to shaping the future with confidence.
Hayne report – first impressions
Commissioner Hayne's recommendations may initially seem somewhat modest – they do not undo vertical integration, impose limits on executive remuneration or ban bonuses and they do not recommend that directors prefer the interests of their customers. But, while it is true that the recommendations are not radical, there is much in the report that will mean some real changes for financial services companies, their boards and their executives, as well as for their regulators and advisers. The Federal Government has said that it will take action on all of the recommendations.
A round-by-round review of the key recommendations for consumer lending, financial advice, superannuation, insurance and more.
What this means for...
A comprehensive review of how the Royal Commission will affect these key areas.
Governance and directors' duties
While the Commission was primarily focused on misconduct in the banking, superannuation and financial services industries, there are a number of lessons arising out of the hearings and the Final Report that will resonate with entities in other industries. This is certainly the case with governance and directors' duties. Shining the spotlight on how and why things went wrong, practices of the boards were often called into question, with the Commissioner stating that 'the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management'. As such, it was necessary for the Commission to consider the culture, governance and remuneration practices of the relevant entities. So, what did we learn and how do we think it will play out in the governance space?
Risk, compliance and personal accountability
As foreshadowed in its Interim Report last year, the Royal Commission's final report sets the tone for increased personal accountability in relation to risk and compliance in the financial services sector. The Commissioner notes:
…there can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management. Nothing that is said in this Report can be understood as diminishing that responsibility. Everything that is said in this Report is to be understood in the light of that one undeniable fact: it is those who engaged in misconduct who are responsible for what they did and for the consequences that followed. In light of that statement, the Commissioner has recommended that:
- the Banking Executive Accountability Regime be extended in line with similar legislation in the UK, as well as to include a new focus on accountability for the lifecycle of financial products; and
- there be greater focus on, and more resources devoted to, non-financial risk within financial institutions.
We discuss these recommendations and their likely practical impact.
Class action risks in financial services
Over recent years, the banking and financial services sector has been subject to more class action filings than any other sector in the Australian economy (see Class Action Risk 2018). This trend is set to escalate over the coming years, as a result of the broad range of issues exposed during the Royal Commission – with the risk having already crystallised for several corporations.
New regulatory enforcement landscape
The Royal Commission's final report sets the tone for increased enforcement activity in 2019 and beyond. A key observation made at the start of the report is that those who engaged in misconduct were not properly held to account and that 'misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished'. In tandem, the report also clearly critiques the effectiveness of regulatory oversight of the financial services sector. These views permeate the Commissioner's recommendations in the report. With these strongly stated findings, we can expect to see:
- increased supervision and monitoring by both APRA and ASIC;
- a tendency for ASIC to commence litigation in place of enforceable undertakings and infringement notices – where enforceable undertakings are used, 'concerns' will likely be replaced with clear admissions;
- increased APRA enforcement activity where consistent with its prudential mandate;
- hot-button topics for enforcement activity emerging around breach reporting, individual accountability and culture, remuneration and governance; and
- a generally sharpened focus from financial regulators, who will soon be subject to oversight from an external independent body.
The Royal Commission's final report reiterates the long-standing sentiment held by Australia's financial regulators – that to prevent misconduct, financial services entities need to foster a culture that prioritises customers over profit. The Report found that culture was, to a large extent, driven by remuneration structures that incentivise employees to act in ways that may or may not be consistent with the needs of their customers. Commissioner Hayne has recommended that significant changes be made to the current remuneration practices of financial services entities. This article sets out the key recommendations and the impact that these changes are likely to have moving forward.
Unsurprisingly, the Commission's Final Report repeats the finding in the Interim Report that a key cause of the conduct identified in those reports can be attributed to the culture within the organisations concerned. In the Commissioner's view, culture can both 'drive or discourage misconduct'. For financial services entities, there will be a requirement to conduct regular culture and governance assessments, and to correct any problems that have been identified. For the reasons set out in our article, it is important that legal and compliance functions are involved in this process.
Mortgage brokers and financial advisers
Our colleagues Alexandra Mason and Keerthi Ravi have considered in some detail the findings of the Commissioner in relation to mortgage brokers in their article on consumer lending. Of interest, is Commissioner Hayne's desire to regulate mortgage brokers using principles and concepts that we have seen applied to the financial advice sector. In this article, we break down the parallels that the Commissioner has drawn for remuneration and duties and how this 'transplant' might look in practice.
Although the Royal Commission was concerned with misconduct in the financial services industry, many of the findings and recommendations are directly relevant to other industries because they concern challenges common to other industries or because they may influence regulation or stakeholder expectations in those industries. This article outlines the key takeaways for organisations outside of the financial services industry, on the following topics: culture and social licence; senior leadership and governance; asymmetry of power and information between entities and customers; risk and compliance; and the role of regulators.
What we do
In an evolving landscape, we provide our clients with advice that is practical – both in relation to the law and to the commercial dynamics.
Solutions for your business
We bring a deep understanding of the financial services sector and, through our Royal Commission work and on leading transactions, remain at the forefront of the laws and policies that shape, and will continue to shape, your business. Our financial services team draws on experts across a range of disciplines, including M&A, disputes, regulatory response, corporate governance, risk and advisory, banking and finance and funds management, superannuation and wealth management.
Access to the right people with the right approach
As financial services laws evolve and increase in complexity, you will require expertise that fits the needs of your business. We have the depth of experience and bench strength to handle the largest and most complicated matters, and draw on cross-practice expertise to provide an end-to-end offering.
A flexible approach to match your priorities
As you respond to regulatory changes, we meet your needs – from managing your risk and compliance programs, to working with regulators and advising on your transactional requirements. For close to 200 years, we have worked with lenders, borrowers, government, advisers and other participants in the financial services sector. We advise on best practice and, in many cases, have played a role in setting it. Our Alliance with Linklaters, one of the leading banking and finance law firms in the world, also provides us with access to the latest global developments affecting you.
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