The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) has released its Interim Report. The report can be access here.
The purpose of the Interim Report is to seek to identify and gather together the questions that have come out of the Commission’s work so far. The Report states that there will be a further round of public hearings to consider these and other questions that must be dealt with in the Commission’s Final Report.
As part of the Interim Report, the Commissioner asks “what response should be made to the conduct identified and criticised in [the] report”. Submissions are requested on several issues that will no doubt be considered as part of the recommendations made next year.
The following is a summary of the issues, causes and responses that have emerged from the matters examined by the Royal Commission.
Issues
The Commissioner believes that the relevant issues in relation to credit and banking services can be divided into four categories:
- Access to banking services;
- Roles and responsibilities of intermediaries;
- Responsible lending; and
- Regulation and regulators.
These issues affect all of the matters examined by the Royal Commission including consumer lending, financial advice, small and medium enterprise lending, agricultural lending and the provision of services to remote communities.
Access
The Interim Report questions whether all Australians have adequate and appropriate access to banking services. In particular, the Commissioner focuses on the difficulties remote communities (including remote Aboriginal communities) and farmers have in accessing those services.
Intermediaries
The Interim Report finds that intermediaries (such as mortgage brokers, mortgage aggregators or authorised representatives) are seen by consumers as the face of the relevant licensee. This raises questions about the obligations intermediaries owe toward customers and licensees, and customer expectations of the intermediaries with whom they deal.
Responsible Lending
The Interim Report finds that there is confusion around the interpretation and application of obligations imposed by the National Consumer Credit Protection Act 2009. Of particular concern is the confusion over the interpretation of the obligation to verify a customer’s financial situation. The examination of this obligation has directed attention to the tension between responsible lending and the processes used by entities in calculating a consumer’s ability to repay a loan.
Regulation
The Interim Report questions the effectiveness of regulators. It asks whether the regulatory and enforcement practices of ASIC and APRA are satisfactory and if not, how they should be changed.
Causes
The Commissioner identifies that the relevant issues are a consequence of the following causes:
- Conflict of interest and duty;
- Remuneration structures;
- Culture and governance; and
- The response of regulators.
Conflict of interest and duty
The Interim Report raises issues caused by the treatment of such conflicts as those that can be, and should be ‘managed’. This is of particular relevance to financial advice, as some vertically integrated entities both manufacture and sell financial products while, at the same time, advising clients which products to use or buy.
Remuneration
The Interim Report questions whether any customer facing employee should be paid variable remuneration. It also considers whether more should be done to implement the recommendations of the Sedgwick Review including those which would that would see an end to the direct link between the sales made by an employee and their pay packet.
Culture
In the Interim Report, the Commissioner identifies the culture of financial services entities as a critical factor. He identifies all of the conduct as concerning in the Interim Report, aside from immaterial exceptions, was the conduct that provided a financial benefit to the entity (or employee) concerned. The culture of these entities was reflected in their remuneration practices, not their governance and risk management practices.
Regulators
The Commissioner appears to believe that ASIC and APRA have not been as active as needed. It questions whether ASIC’s enforcement priorities should change, for example by requiring ASIC to institute proceedings if there is a reasonable prospect of proving a contravention unless it determines that proceedings are not in the public interest. It also asks whether the identified issues call for a reconsideration of APRA’s prudential governance standards.
Responses
The Commissioner concludes the Interim Report by asking “what response should be made to the conduct identified and criticised in [the] report”. More particularly, he asks:
- Are changes in the law necessary (for example, to simplify the law or reduce certain carve outs and exceptions)?
- How should entities manage conduct and compliance risks?
- How should regulators respond to conduct and compliance risk?
- Should the regulatory architecture change?
- What is the proper place for industry codes of conduct (for example, should the 2019 Banking Code of Practice be given legislative force)?
Submissions
Submissions in respect of these questions can be made here and must be received no later than 5pm on 26 October 2018.
HWL Ebsworth has a specialised team of experts across all aspects of the subject matter identified in the financial report.
This article was written by Michael Anastas, Partner, James Moore, Partner and Byron David Solicitor .
