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Royal Commission into misconduct in the banking, superannuation and financial services industry

In December 2017, the Australian government established a Royal Commission into alleged misconduct in the banking, superannuation and financial services industry (Financial Services Royal Commission, or FSRC) with the intention of reinforcing honest and fair dealings between the Australian public and banking, superannuation and financial services providers.

Key themes arising during early hearings have been the failure of the banks to self-report misconduct, conflicts of interest arising from incentive structures for bank employees and third party intermediaries, the effectiveness of bank systems and controls to ensure compliance with responsible lending requirements, and the adequacy of the banks’ remediation efforts in response to discovered misconduct.

Real life case examples of bank will be examined

Typical features of an Australian Royal Commission include public consultation, document requests, and public hearings (usually involving testimony from lay and expert witnesses) which culminate in the Commission handing down findings and making recommendations. The public hearings often proceed by reference to “case studies”, whereby specific instances of relevant conduct are examined in particular detail. While the public hearings can take on many of the traditional features of a large-scale litigation, a Royal Commission also has substantial coercive powers which are not limited by traditional protections relating to legal professional privilege and self-incrimination.

Broad terms of reference

The Terms of Reference require the FSRC to inquire into whether any conduct by financial services entities might have breached the law, a duty, recognised professional standards, or a recognised and widely adopted benchmark for conduct, or is misleading, deceptive or unconscionable. It will also consider whether any such conduct is attributable to the culture of financial services entities or aspects of their systems, controls and remuneration practices, and whether the existing regulation of the financial services industry is adequate. To date, the inquiry has focused heavily on retail activities within the financial services sector; however, the terms of reference are broad enough to cover all aspects of product manufacturing, distribution, advice and claims handling. The FSRC will also inquire into whether the use of superannuation members’ retirement savings by financial services entities, for any purpose, does not meet community standards and expectations, or is otherwise not in the best interests of its members. The Commission has scope to consider matters occurring outside of Australia.

“Big Four” give evidence at first round of public hearings

The first round of public hearings was held in March 2018, focusing on consumer lending in the context of residential mortgages, add-on insurance products, account administration errors, car finance and credit cards. The FSRC explored these topics by reference to a series of case studies, the primary subjects of which were the “Big Four” Australian banks. Evidence was led by the examination of witnesses, the majority of whom were representatives from the relevant banks, together with a small selection of consumers who had been affected by the conduct in question.

The key issues that emerged from the first round of hearings included the failure of the banks to self-report misconduct, conflicts of interest arising from incentive structures for bank employees and third party intermediaries, the effectiveness of bank systems and controls to ensure compliance with responsible lending requirements, and the adequacy of the banks’ remediation efforts in response to discovered misconduct.

The second round of hearings commenced on 16 April 2018 and focussed on the financial planning and wealth management industry, exploring the topics of fees for no service, investment platform fees, inappropriate financial advice, inappropriate conduct by financial advisers, and the disciplinary regime for the financial advice profession.

The FSRC’s interim report is due on 30 September 2018, with a final report due by February 2019.

General clamp down on financial institutions

The FSRC is just one of a number of measures introduced by the Australian government to hold financial institutions to high standards of conduct and afford greater protections to consumers. The government has also enacted a Banking Executive Accountability Regime, which is due to take effect from 1 July 2018 and will impose significant accountability obligations on directors and senior executives of authorised deposit-taking institutions (ADIs) as well as on the ADIs themselves. Also in the pipeline are proposed amendments to Australia’s whistle-blower regime which, if enacted, will broaden the scope of corporate misconduct that can be the subject of a protected whistle-blower disclosure, and will enhance the protections, immunities and compensation available to whistle-blowers.

Further information

This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – karen.birch@allenovery.com, or tel +44 20 3088 3710.