The Royal Commission heats up

By Belinda Thompson
Banking Financial Services Financial Services Royal Commission Insurance Superannuation

In brief

Written by Partner Belinda Thompson and Lawyer Shamistha Selvaratnam

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) is well underway, with its first round of public hearings wrapping up less than a month ago. By reference to a number of case studies, the first round of hearings focused on consumer lending practices. In this article, we report on the key themes identified by the Commission as arising from the hearings.


The Royal Commission was established to inquire into the conduct of financial services entities to further ensure Australia's financial system is working efficiently and effectively. The Royal Commission's terms of reference require the Commissioner, the Honourable Kenneth Madison Hayne AC QC, to inquire into a broad range of matters, including:

  • whether any conduct by financial services entities might have amounted to misconduct;
  • whether any conduct, practices, behaviour or business activities by financial services entities fall below community standards and expectations;
  • whether any misconduct is attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the relevant industry or subsector; and
  • whether any changes to the legal framework, practices within financial services entities and the financial regulators are necessary to minimise the likelihood of misconduct by financial services entities in the future.

The Commissioner's final report is due no later than 1 February 2019.

To date, the Commission has appeared to focus it attention on authorised deposit-taking institutions (ADIs). As stated by Senior Counsel Assisting the Royal Commission, Ms Rowena Orr QC, one quarter of the listed companies on the ASX 20 and seven of the listed companies on the ASX 100 are ADIs. ADIs contribute substantially to the national economy. As at September 2017, ADIs held approximately $4.6 trillion in assets, a figure around two-and-a-half times the size of Australia's $1.8 trillion nominal economy, as measured by nominal GDP. 1

Key themes arising from first round of hearings

The Commission examined consumer lending practices by reference to case studies in relation to the treatment of consumers by financial services entities in connection with residential mortgages, credit cards, car loans, add-on insurance and overdrafts. It also considered the arrangements and practices of financial services entities and their intermediaries.

During the closing address, Ms Orr QC identified a number of themes that were seen as emerging from the hearings, including:

  • the role of remuneration structures in rewarding financial services entities' employees and brokers for volume of sales of loans and the conflicts of interest created by such remuneration structures;
  • the adequacy of financial services entities' systems and processes to prevent, detect and respond to fraud;
  • the policies and processes that financial services entities have in place to assess home loan applications and the use of benchmarks as part of that process;
  • the policies and processes financial services entities have in place to ensure that they comply with their legal obligations, in particular, their responsible lending obligations;
  • the responsiveness of financial services entities in responding to issues once they have been identified;
  • the adequacy of financial services entities' systems to provide timely and full remediation to customers who suffer detriment; and
  • the adequacy of financial services entities' remediation and review processes to prevent identified issues from reoccurring.

Persons having leave to appear were invited to make submissions to the Royal Commission in relation to the identified emerging themes.

Potential implications for financial services sector

The key themes discussed above indicate the areas that we can expect the Commissioner to report on in his final report with respect to consumer lending practices. Therefore, it is appears likely that the Commissioner's final report will report on, and may make recommendations relating to matters including remuneration structures, responsible lending policies and obligations and remediation policies and structures.

What's next?

Given the short timeframe within which the Commissioner is required to prepare a final report, it is full steam ahead for the Royal Commission. The second round of hearings will commence on 16 April 2018 and will focus on the financial planning and wealth management industry.


  1. Transcript of initial public hearing on 12 February 2018, p 16.