Australia’s financial services sector is set for a compliance and governance overhaul following the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The formal public inquiry into alleged misconduct – often referred to as the Banking Royal Commission or the Hayne Royal Commission after its leader, the Honorable Justice Kenneth Madison Hayne AC QC – was held throughout 2018, and the final report of Justice Hayne, handed down in February 2019, recommends the biggest changes to Australian banks since deregulation in the 1980s.
A Royal Commission confers considerable powers, but is strictly limited by the terms of reference which are drawn up for each Royal Commission. They are generally called to look into matters of national importance or controversy. For example, previous federal Royal Commissions in Australia have looked at Aboriginal deaths in custody, British nuclear tests conducted in Australia and union corruption. That shows the seriousness of the misconduct seen to be taking place in Australia’s financial services.
The Banking Royal Commission was controversial from the outset, and was ultimately called somewhat against the government’s will following an outcry about consumer protection in Australia’s financial services.
The Issues Found in Australia’s Financial Services Sector
The Commissioner found that profit motive was at the very root of the problem in Australian banking – that conduct was driven “not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain… Providing a service to customers was relegated to second place. Sales became all-important.”
Following seven rounds of public hearings over 68 days, and having called more than 130 witnesses and reviewed over 10,000 public submissions, the Commissioner’s final report makes 76 recommendations for behavior improvement in Australia’s financial services sector; 24 of those relate to institutions and individuals with regard to dishonest misconduct, and the regulators have been charged with the responsibility to act on those.
Some of the biggest headlines during the Banking Royal Commission came from the “fees for no service” scandal, where customers reported being charged for services like financial advice that they had never received – sometimes they were even charged after death.
The strong message from the Commissioner is that the banking industry must turn from profit-focused to service-focused – that the systemic focus on profit and bonuses at all costs must come to an end. Justice Hayne was clear that this culture change must be led from the top, and charged boards and directors to give serious consideration to how their decisions impact the whole organization.
This culture change extends to remuneration processes. That customer service representatives felt pressure to sell add-ons, and that some remuneration could end up doubling a rep’s annual salary, was singled out by Justice Hayne as driving misconduct. He recommends that commissions should be largely eliminated from the financial sector – including commissions for mortgage brokers, financial planners and insurance sales. His reasoning is these commissions can create conflicts of interest, as there is so much vertical integration in the industry and it’s unclear to customers that this mortgage broker recommending that bank is ultimately feeding its parent company more sales. Unsurprisingly, the brokerage and superannuation sectors, in particular, are resistant to this.
Improved governance and oversight
In his final report, Justice Hayne emphasized that the primary responsibility for misconduct lies with the entities concerned and with those who manage and control them. He notes that “non-financial risk” was often overlooked in the drive for profit.
The Australian Institute of Company Directors says that all entities, regardless of sector, could do with this warning: take proper steps to assess the entity’s culture and governance; identify any problems with that culture and governance; deal with those problems; and determine whether the changes have been effective.
It’s important, too, that governance is documented and held in an easily accessible central repository. This will help all entities to follow the same processes, and ensure entity governance is sound.
The role of the regulators
The final report of the Banking Royal Commission ultimately found that, while misconduct was widespread in the industry, the regulators did little to deter that misconduct. While it stopped short of calling the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) “toothless tigers,” it did note that they rarely pursued criminal investigations. He was critical that the laws regulating financial services entities were not enforced or enforced effectively – that too often financial services entities broke the law but were not properly held to account.
ASIC has since requested responsible entities provide information around their rewards and incentives structures, their statements of value, and the extent to which the board has considered culture and conduct as part of ongoing surveillance activities. It’s a sign that they are likely to step up scrutiny of all financial services entities from here on.
What Does This Mean for Australia’s Banking and Financial Services Sectors?
Although Justice Hayne has called for some tweaks to the law, he’s mainly prescribed self-regulation to Australia’s financial services. He wants the industry to adopt the recommendations from the Sedgwick review of product sales commissions and product-based payments in retail banking.
Tellingly, he wrote that much of the misconduct found was in the contravention of existing laws, and so further regulation would not help the industry. In fact, it would add an extra burden to an already-complex regulatory regime.
But self-regulation clearly didn’t provide enough of a deterrent to the big players, and so commentators expect the regulators to respond to the Commissioner’s shaming by becoming extra vigilant. ASIC is already promising that litigation, rather than negotiation deals, will be its first option in future investigations – that it is “getting tough.”
This means that Australia’s financial services and banking businesses will need to be in full control of their compliance and governance. No stone can remain unturned, and no transgression can remain undocumented. An extra-vigilant watchdog will likely mean more investigations and more monitoring, so it will pay to review any internal governance and compliance processes and ensure that everyone, from the board down to customer-facing staff, is aware of their responsibilities.
Importantly, there needs to be a change in culture within Australia’s financial services businesses, and it must be led from the top. While there is short-term pressure from shareholders on margins, there must also be a long-term plan in plain sight that is focused on putting customers first, on supporting the communities in which banks operate and on restoring trust in the sector.
The final report contemplates six general rules for Australia’s financial services sector, as summarized by PwC:
- The law must be applied and its application enforced
- Industry codes should be approved under statute, and any breach of key promises made to customers in the codes should be a breach of the statute
- No financial product should be hawked to retail clients
- Intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary
- Exceptions to the ban on conflicted remuneration should be eliminated
- Culture, governance and remuneration practices, both in the industry generally and in individual entities, must focus on non-financial risk as well as financial risk
Harness Technology to Get a Bird’s-Eye View of Your Entities
One of the big themes throughout the Banking Royal Commission was the failings of governance in Australia’s financial services sector. There’s also an expectation that the regulators will be more hardline and demand more from all sector players as a result of the dressing-down they received in the final report.
This means those in Australia’s financial services sector will need easy access to entity management information and real-time data to be able to prove compliance quickly. Justice Hayne berated some of the big players for their limited access to documentation regarding culture and compliance failings in recent years; this could have been avoided if the Big 4 had strong entity governance and a central repository for all entity management information.
Diligent’s entity management software provides central, cloud-based storage for all subsidiary-related information to establish a single source of truth for all entity-related information. A global entity management software such as Diligent’s allows for the implementation of processes and procedures to ensure precision, accuracy and timeliness – helping to give access to the necessary data to prove compliance when needed.
Likewise, Diligent’s board portal is built for directors, allowing easy collaboration and voting, plus dedicated virtual spaces for communication and committee decisions. Board management software eases the burden on corporate secretaries and general counsels, providing a solution to the final report’s recommendation for stronger board document management and minutes handling.
Request a demo and discover how the Diligent suite of compliance and governance software can help get your financial services entities on track and in compliance with the Banking Royal Commission’s recommendations.