A Commission of Inquiry - of the Royal, not the Parliamentary, kind

By Michael Mathieson
Banking Financial Services Financial Services Royal Commission Funds Insurance Superannuation

In brief

Written by Senior Regulatory Counsel Michael Mathieson

Since the announcement of the Royal Commission into, ahem, financial services, much has been written and said – a lot of which suggests that little attention is being paid to the terms of reference. In this article I take a look at those terms.

But first, a little context.


The preamble to the terms of reference states: 'Australia has one of the strongest and most stable banking, superannuation and financial services industries in the world, which performs a critical role in underpinning the Australian economy. Australia's banking system is systemically strong with internationally recognised and world's best prudential regulation and oversight.' A foreigner who read this, and who had no knowledge of the current state of political affairs in Australia, could be forgiven for asking, why announce a Royal Commission?

The preamble to the draft version of the terms of reference also stated: 'The Commission's inquiry will not defer, delay or limit, in any way, any proposed and announced policy, legislation or regulation of the Government.' That may be so, however the Parliament may well 'defer, delay or limit' such measures and, further, by pressing on with its agenda the Government will make the Commission's job even harder than it will already be. The outcome described in this statement is precisely the opposite of what the banks asked for when they wrote to the Treasurer asking for a Royal Commission. It is noteworthy that this statement does not appear in the final version of the terms of reference.

Financial services entity

We should all make a conscious effort to dispense with the expression 'a banking Royal Commission'. The terms of reference apply in relation to a 'financial services entity'. This includes 'authorised deposit-taking institutions', being Australian-owned banks, foreign subsidiary banks, branches of foreign banks, building societies, credit unions and a few other reasonably obscure organisations. It also includes general insurers and life companies. It also includes Australian financial services licensees and authorised representatives, as well as mortgage brokers. Finally and very interestingly, it also includes 'RSE licensees' (ie APRA-regulated superannuation trustees) and any person or entity that 'has any connection (other than an incidental connection) to such an RSE licensee'. I will come back to the significance of this notion of a non-incidentally connected person or entity later.

Misconduct and community standards and expectations

The Commission must inquire into 'whether 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'. Misconduct is defined oddly. It is broad, in that it extends to conduct that 'breaches a professional standard or a recognised and widely adopted benchmark for conduct'. However, while it specifies some breaches of the law (offences and misleading or deceptive conduct are examples) it does not specify all breaches of the law – although most would agree that the law qualifies as 'a recognised and widely adopted benchmark for conduct'. Misconduct will also extend to 'a breach of trust', a limb of the definition that would seem to be relevant to superannuation trustees alone.

The definition of misconduct does not, ultimately, matter very much, because the Commission must also inquire into 'whether any conduct, practices, behaviour or business activity by financial services entities fall below community standards and expectations'. It will be interesting to see how the Commission goes about ascertaining 'community standards and expectations'.

It is obvious that the scope of the Commission's inquiries, as described above, is extremely broad. It could easily be the work of 5, 10 or 20 years. However, the terms of reference also declare that the Commission 'may decide not to inquire into' a particular matter otherwise within the scope of this Inquiry, 'but any such decision is [the Commission's] alone'. Given the breadth of the other terms of reference, this provision is necessary. However, one of the many great difficulties facing the Commission will lie in how best to exercise this discretion.

Superannuation members' retirement savings

Going by the media reports, the most controversial term of reference has been the one under which the Commission must inquire into 'whether 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 interest of those members'. There are a few points of interest arising from this term of reference.

The first is that all superannuation trustees use fund members' retirement savings for a variety of purposes. So much follows from the (profoundly misdescribed) 'sole purpose test' in section 62 of the SIS Act – containing as it does various core purposes and various ancillary purposes. Further, some trustees charge fees to make a profit – is this a 'use of retirement savings' for a purpose and, if so, is it a permitted purpose? This question directs attention to the next interesting point.

In this context, what is a purpose that 'does not meet community standards and expectations or is otherwise not in the best interest of those members'? Let's assume the Commission is able to formulate a mechanism for ascertaining 'community standards and expectations'. A necessary implication of this term of reference is that something that does not meet those standards and expectations is not in the best interests of members.

As a superannuation lawyer, I have read a lot of cases about, and written a lot of advices about, whether something may or may not be in the best interests of members. I have never come across anything to suggest that the best interests of members are determined in whole or in part by reference to community standards and expectations. The Commissioner is an eminent jurist who has not only read many cases but written many judgments too. I would be most interested to know what the Commissioner thinks of this particular term of reference.

The third point of interest is that it is easy to think of many entities, other than unions, that are 'non-incidentally connected with' APRA-regulated superannuation trustees (and, therefore, financial services entities whose conduct is to be examined by the Commission). They include: employer-sponsors, employer associations, life companies, service providers and, in some cases, ahem, banks. For example, it would be well within the Commission's remit to inquire into, and report on, the appropriateness of the provision of life insurance cover within a superannuation environment.


There are other terms of reference, but the ones set out above are the main ones. Here at Unravelled we are looking forward to keeping abreast of the Royal Commission and reporting to our faithful readership on its activities.