Australian Financial Services Royal Commission Interim Report released

The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Australian Royal Commission, or Hayne Commission), released its Interim Report on 28 September 2018.  This followed the first four rounds of public hearings held between March and July this year, which have drawn considerable attention and concern in Australia and New Zealand.

The Interim Report is available here.

Who needs to read it? Why?

Those operating in or regulating the financial services sector, particularly who have any responsibility for an institution’s conduct and culture.  For those outside Australia whose conduct has not already been held up to scrutiny in the Hayne Commission hearings, the Interim Report will be an important guide for self-assessment as to the adequacy of a financial firm’s customer focus and its conduct and culture-related governance.

What does it cover?

The Interim Report – spanning three volumes – covers topics dealing with misconduct and issues in relation to:

  • Consumer lending
  • Financial advice
  • Small and medium enterprises
  • Bankwest and CBA
  • Agricultural lending
  • Remote communities

The Interim Report asks what can be done to prevent the conduct from happening again, and comments on issues to do with:

  • Regulation and the Regulators:  The Interim Report describes problems in relation to the actions of the Australian regulators, with misconduct by regulated entities not punished or with inadequate consequences.  It notes that most of the now condemned conduct was already contrary to the law, and suggests that further new laws may not be the solution; should there be simplification of the laws, better administration or enforcement?
  • The causes of misconduct at entities: A key factor identified was that ‘too often’ sales were the ‘sole focus of attention’ for financial institutions, with staff measured and rewarded by reference to profits and sales.  The Interim Report states “Almost every piece of conduct identified and criticised in this report can be connected directly to the relevant actor gaining some monetary benefit from engaging in the conduct.  And every piece of conduct that has been contrary to law is a case where the existing governance structures and practices of the entity and its risk management practices have not prevented that unlawful conduct”.[1]

Our view

The Interim Report will be the subject of careful analysis by financial institutions, their advisers, the regulators, Parliament and commentators on both sides of the Tasman.  While at this stage the Interim Report does not make final recommendations for changes to or regulation of the financial sector, it raises a number of issues with the existing position in Australia, and suggests that regulatory complexity is not the answer.

The Interim Report gives clear examples of where things have gone wrong, including through case studies.  It will be used by financial institutions to continue to guide improvements in their own practices and procedures – as the developments which have emerged over the course of the Hayne Commission hearings in Australia have been used already.  The Hayne Commission notes that positive effect in its Executive Summary – that as the Commission’s work has progressed, in anticipation of its findings both entities and regulators have sought to ‘get ahead of the game’ by announcing improvements to their policies and procedures, and increasing regulatory focus.

What next?  What about New Zealand?

This is not the final report for the Hayne Commission, and it also does not cover the Superannuation or Insurance round of hearings that have been held recently, or the Policy round of hearings which will take place in November.  The final report is due by 1 February 2019.

The Hayne Commission has been the main impetus for the Financial Services Conduct and Culture Review currently being undertaken by the New Zealand regulators, the Financial Markets Authority and Reserve Bank.  The FMA and RBNZ have been awaiting this Interim Report before they report on their review in relation to New Zealand Banking Conduct and Culture, which is expected toward the end of October.  (Their report in relation to the life insurance sector will follow later.)

The Interim Report will doubtless be used by the FMA/RBNZ in preparing their assessment of the state of the conduct and culture of New Zealand’s own main financial institutions, and the extent to which any of the practices called out in Australia are present here.  To date, the FMA/RBNZ has not indicated they have seen evidence of systemic issues warranting a similar Royal Commission of inquiry in New Zealand.

If you have any questions in relation to the Financial Services Conduct and Culture Review or the Interim Report, please contact one of our experts.

Footnotes

[1] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Interim Report, page 302.

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