Lessons learnt, so far, from the Hayne Royal Commission

Michael Adams

There has been a lot of recent publicity surrounding Hon Kenneth Hayne AC QC's Royal Commission into the Misconduct of Banking, Superannuation and Financial Services Industry.  Although the Commission, which I will refer to as the Hayne Royal Commission ('HRC'), commenced on 14th December 2017, and is meant to be completed by February 2019, the publishing of the 'Interim Report' on 28 September 2018 delivered a lot of food for thought for both accountants and financial planners.

Additionally, the Australian Prudential Regulatory Authority (APRA) commissioned a separate report in August 2017 focused on the 'Prudential Inquiry into the Commonwealth Bank of Australia'.  The Panel appointed included Jillian Broadbent AO, Dr John Laker AO and Professor Samuel Grant AC, who published their report on 30th April 2018.  This report into the governance, accountability and culture of The Commonwealth Bank of Australia ('CBA') has become a benchmark - with recommendations having been made, against which all financial services providers are able to compare themselves.

This article provides a summary of the key lessons to be learnt, so far, in the area of financial services.  However, it must be kept in mind that the final report, as well as both the government's response and its implementation of any recommendations, will occur in 2019.

To start, there are six general lessons to come from the HRC Interim and CBA Prudential Inquiry reports.

Commissioner Hayne's interim report contains just six simple principles to be applied by directors, officers responsible for employees, and other relevant representatives within financial services organisations.  The report notes that any Australian Financial Services Licence (AFSL) holder already bound by the general requirements found in section 912A of the Corporations Act 2001, as well as any detailed conditions on the AFSL itself, would be well aware of such requirements.

They are known as #Haynes6commandments:
1.    Obey the law;
2.    Do not mislead or deceive;
3.    Be fair;
4.    Provide services that are fit for purpose;
5.    Deliver services with reasonable care and skill; and
6.    When acting for another, always act in their best interests.

These are actually all very well-known and widely-understood principles under the common law (case law), and are required both by the equitable fiduciary duties of trustees and agents, and under the legislation (especially sections 180-184 and 912A of the Corporations Act 2001 [Cth]).  

To expand on these basic principles, both the HRC interim report and the CBA prudential inquiry report provide detailed case studies of 'what not to do'!  Any professional accountant or financial planner who follows quality ethical standards, acts in the best interests of their clients, obviously acts legally, and acts with reasonable care and skill WILL meet and surpass the minimum standards expected by the law.

The HRC has brought to light conduct within the financial services industry that has been condemned by the public.  Some of the misconduct was previously known to the government regulators (both the Australian Securities and Investment Commission and the Australian Prudential Regulatory Authority), while some was already known to the general public.  

The interim report asked questions along the lines of "why did it happen?" and "what can be done to avoid it happening again?", with these being particularly relevant queries for the banks, loan intermediaries and financial advisors.  Combined, the two reports have promoted debate, as well as scrutiny surrounding the level of trust and confidence that the public has in the Australian financial services industry.  This public scrutiny is forcing accountants and financial planners alike to focus on the future provision of services.

Why? 

This is a question that has come up throughout the HRC, and the simple answers appear to be 'greed', and 'the pursuit of short-term profits at the expense of basic standards of honesty'.  The Governance Institute of Australia's 2018 Ethical Index rated the financial sector at just 28%, with this being the lowest of all industries/professions in the country.  Based on this rating, the financial sector is the most unethical, as compared to a range of Australian sectors - with education at above 70% being seen as the most ethical.

The HRC presented the worst examples as case studies, including the well-publicised incidents of dead clients being charged for advising fees, and financial institutions being slow to rectify the situation.  Sales were the primary focus from the executive suite all the way to the front line, and remuneration was linked to profit and sales, at all costs.  If misconduct was revealed, it either went unpunished, or the consequences did not meet the seriousness of the breach.  The regulators, both ASIC and APRA, rarely went to court, and minor sanctions were subsequently applied - a mere apology and a community benefit payment.

What now?

As the HRC has progressed through its inquiry, public submissions and hearings, financial services providers and regulators have sought to anticipate the final outcomes of the royal commission.  The responses have come in the form of a wide range of announcements, including new programs for refunds or remediation for consumers, the abandonment of financial products, the selling off of divisions within businesses, and the commencement of formal court proceedings.

The key words in 912A of the Corporations Act 2001 (Cth) look to ensure that services provided by all AFSL holders are done so 'efficiently, honestly and fairly'.  The enforcement of existing laws is, within this context, better than adding another complex layer of new laws and regulations to say "do not do that"!  A review of how existing laws are administered and enforced, as well as the relevant penalties, has already been conducted.  

Maybe the six basic standards of fairness and honesty in the #haynes6commandments is a better approach than a massive re-write of the legal requirements? 

The HRC interim report is made up of three volumes, and contains over 1,000 pages.  There are many questions relating to possible reforms, although Commissioner Hayne has not yet set out the actual recommendations (these will be in the Final Report in February 2019, unless the wait-time is extended).  Areas of focus will include:

In addition to the 9,000 public submissions and six months of public hearings (with more to come in November and December 2018), the HRC has thus far relied upon 29 detailed research papers, produced both by the commission staff and external consultant experts.  The methodology in the proceedings has involved detailed case studies based on information provided by both financial service providers and regulators through breach reporting (under section 912D Corporations Act 2001 [Cth]).  These case studies have been useful in providing clear illustrations of the various misconduct practices within the financial services industry.

The CBA Prudential Inquiry is different to the HRC, as it deals with one company (Australia's largest listed company by market capitalisation) rather than a whole industry.  The APRA report provides 35 recommendations to CBA across the domains of:

Many larger financial services entities have taken the broad recommendations and applied them to their own entities in order to see how they would respond if APRA required the same inquiry of them.  Boards have worked with external consultants, professional advisers and their internal lawyers/auditors in making these assessments.  As an example, a financial services provider (including financial planners) might examine governance and focus on:

  1. The role of the board;
  2. Senior leadership oversight;
  3. Risk management and compliance;
  4. Issue identification and escalation; and
  5. Financial objectives and prioritisation.

Financial planning as an industry (and financial advisers in particular) is in need of reform in order to help promote the best interests of the client.  In November 2018, the government released draft laws for the new code of ethics, new education standards by examination, and a professional year of training (post university graduation).  These have been compiled by the Financial Advisers Standards and Ethics Authority (FASEA) as an independent body set up in April 2017.  Drafts will be realised for comment, with the intention of a January 2019 roll-out.  It is believed that 10,000 of the 25,000 currently registered financial advisers will leave the industry in the next five years, as a result of the incoming FAESEA reforms.  This is before the HRC hands down its recommendations for sector -wide reforms.

Watch this space - there is more to come..