Written by Partner Andrew Maher
The hearings in the Financial Services Royal Commission have been compulsory viewing, not only for financial services industry participants and their regulators and professional service providers. The hearings have exposed wide-ranging actual or alleged wrongful conduct that (even though much of it has previously been admitted or established in other fora, or is otherwise the subject of pending regulatory investigations and litigation) has captured the attention of politicians, media and the general public. Despite the Commission's Terms of Reference proclaiming that 'Australia has one of the strongest and most stable banking, superannuation and financial services industries in the world', members of the public and others could, perhaps, be excused for thinking, from the 'headline grabbing' evidence and submissions made in the Commission to date, that this is not the case.
To refresh our memories of what has happened so far – the Royal Commission was announced on 30 November 2017, with a reporting timeline that is, to say the least, tight, bearing in mind the inquiry's considerable scope. Former High Court judge Commissioner Kenneth Hayne AC QC is required to report interim findings and recommendations by 30 September 2018, with his final report currently due on 1 February 2019. The Terms of Reference disclose that the Commission is investigating banks, insurers, super funds, brokers and wealth management firms regarding very broadly defined 'misconduct', and undefined (and somewhat amorphous) conduct that 'fall[s] below community standards and expectations' going back a decade. As lead Counsel Assisting the Commission, Rowena Orr QC observed, with delicate understatement, on the first day of hearings: 'The job ahead … over this coming year is large; the terms of reference are broad and the time to report is short'. On any comparison with recent Royal Commissions, this inquiry is definitely proceeding at a cracking pace.
Commissioner Hayne and Counsel Assisting have certainly risen to the challenge before them. One of the most effective (and novel) steps taken to deal with these temporal limitations was the 'request' – I use the term loosely – made by Commissioner Hayne of tens of industry participants, in December 2017, to disclose each instance of misconduct and conduct falling below community standards and expectations over that 10-year period, by 29 January 2018. Even for the most well-resourced participants, compliance with this particular timeline presented significant logistical challenges. As we are now a couple of months into the Commission's hearing phase, it appears clear that this initial step – in which the Commission received written submissions from 48 organisations, regulators and other stakeholders – has saved considerable investigation time that would have been incurred if the Commission had relied solely on its compulsory information gathering powers.
While conventional wisdom is that the Commission has investigated a wide range of issues affecting a substantial number of industry participants, it is clear that the first two rounds of hearings (covering consumer finance and financial planning) have focused on the 'Big 4' banks and, for the financial planning hearing, AMP. For those participants who have so far escaped the steely gaze of the Commission team, it is important to remain vigilant, because one just never knows when the Commission will knock at the proverbial door. Eg it might be speculated that when Dover Financial Group declined to answer the Commission's call for an early submission in January 2018, its Chief Executive Officer might not have then anticipated that he, among the major industry players, would be required to give oral evidence before the Commission a few months down the track.
The Commission's focus on exposing misconduct that has been established or admitted previously arguably suggests that this Commission's purpose is less about establishing what happened in a particular instance, and more about making findings on why it happened and what more should be done to stop it happening in the future. The Terms of Reference, and the evidence and submissions heard by the Commission to date, suggest that the Commission's proverbial finger is pointed directly at poor remuneration, recruitment, risk management, governance and cultural practices within industry participants as causing, at least in part, the exposed misconduct. Time will obviously tell how effective the Commission will be at achieving this perceived purpose.
In relation to the case studies examined in hearing rounds 1 and 2, Counsel Assisting the Commission have:
- indicated where it is open for the Commissioner to make findings of misconduct;
- put forward possible explanations for this misconduct (including culture, governance, risk management, recruitment and remuneration);
- identified evidence supporting a finding that internal mechanisms for redress were inadequate; and
- identified wider issues on which all parties with leave to appear might make submissions.
During the round 1 hearing (on consumer finance), we saw Counsel Assisting submit that particular entities had breached: (a) responsible lending obligations; (b) duties to provide services efficiently, honestly and fairly (the National Consumer Credit Protection Act 2009 (Cth) and the Corporations Act 2001 (Cth)); (c) s912D of the Corporations Act (the ASIC notification obligations); (d) misleading or deceptive and unconscionable conduct prohibitions; and (e) community standards (including the Banking Code of Conduct). Beyond being invited to make submissions on particular case studies covered in evidence, the participants were invited to make them on such matters as the adequacy of remuneration and incentive policies; fraud detection policies; customer remediation policies; and regulatory reporting policies. The sheer breadth of these topics, combined with the strict page limits and tight timeframes for making these submissions, have presented, and will continue to present, real challenges for both those making submissions and the team receiving them.
From the round 2 hearing, we saw Counsel Assisting submit that particular entities had breached a similar set of laws and regulations covered by round 1, albeit in the context of financial planning activities. Submissions were sought from participants on such matters as whether the much discussed vertical integration of financial product issuers and advice licensees serve clients' interests.
The AMP 'fees for no service' case study received significant attention both within and outside the Commission during the round 2 hearing. That coverage and the immediate casualties of it, including the company's share price and members of its management team, demonstrate the considerable damage that an organisation like AMP may suffer even before the Commission has considered that entity's responses to Counsel Assisting's submissions and made any findings. Whatever your view on the effectiveness of Royal Commissions in making robust findings of fact and liability without the same degree of adversarial participation that occurs in litigation, it is important that observers refrain from drawing conclusions about what happened and why it happened, in a particular instance, without considering all of the evidence and submissions before the Commission. Clearly, this will be the approach that Commissioner Hayne takes when preparing his reports.
At this stage, the misconduct exposed during the Commission's inquiries to date is reflective of an issue encountered, to varying degrees, by financial services industry participants over the past decade. That issue is succinctly encapsulated in an internal bank document quoted by Rowena Orr QC during the round 1 hearing. It said that '[t]he risk and reward equation … was unbalanced in favour of sales over keeping customers and the Bank safe'. Going forward, one of the critical questions for the financial services industry is: how can industry participants better balance the needs of shareholders and customers alike where, bitter experience tells us, those interests can sometimes conflict?
In the meantime, it is hard to predict what precisely will be covered beyond the round 3 hearing (covering SME lending) commencing on 21 May 2018. Rural finance, superannuation expenditure and insurance are likely topics. What is easier to predict, though, is that there will be many more headline-grabbing and potential law-reform-provoking case studies. The proverbial bumpy ride for the industry looks set to continue for the rest of the year (if not longer). So, continue to watch this space. If the past couple of months are anything to go by, it will be hard not to!