This article will give some practical guidance to the Financial Services Royal Commission, its powers, processes and procedures. The next article (Part 2) provides a comprehensive summary of the three Practice Guidelines that have been published by the Financial Services Royal Commission.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) was established on 14 December 2017. The Hon. Kenneth Hayne AC QC has been appointed royal commissioner. An interim report is due to be submitted by 30 September 2018, with a final report due by 1 February 2019. On 12 February 2018, the Financial Services Royal Commission held its first public hearing. It will likely have far reaching consequences for the banking and financial services industries in Australia.
Scope of the Financial Services Royal Commission
The scope of the Financial Services Royal Commission is broad and the terms of reference are contained in the Letters Patent. The Government (through the Governor-General) may expand the terms of reference as required. The inquiry will focus on banking institutions (including all authorised deposit taking institutions – not just the ‘big four’ banks), insurers (including life insurers), Australian financial services licence holders (i.e. financial services business), superannuation entities, and intermediaries between borrowers and lenders. This last category may encompass finance and insurance brokers, and possibly financial planners. The Financial Services Royal Commission will inquire into, among other things:
- The conduct of financial services entities (including its directors, officers or employees), and whether such conduct amounts to ‘misconduct’. ‘Misconduct’ is defined to include conduct that is an offence against law, is misleading or deceptive (or both), a breach of trust, breach of duty or unconscionable conduct, or a breach of a professional standard or widely adopted benchmark for conduct.
- The conduct, practices, behaviour or activities of financial service entities (including the use of superannuation), whether such conduct etc. falls below community standards and expectations, and whether such conduct etc. is attributable to particular culture and governance practices, or other practices.
- The mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct and their effectiveness.
- Existing laws and policies, internal systems of financial services entities, industry self-regulation, and their adequacy.
- Regulators of financial services entities, and their ability and effectiveness to identify and address misconduct.
- Whether changes are necessary to the legal framework, practices within financial services entities, and regulators, to minimise the likelihood of misconduct in the future.
Powers of the Financial Services Royal Commission, and offences for non-compliance
The Financial Services Royal Commission has been established with all the powers conferred by the Royal Commissions Act 1902 (Cth) (the Act). It thereby has very significant powers to conduct its inquiry. It therefore has a broad discretion in deciding how to collect information and inform itself about matters the subject of its terms of reference. It is not bound by the rules of evidence, and may proceed quickly and flexibly in its inquiry.
These powers include (among others) the following:
- The Financial Services Royal Commission can obtain information relevant to its inquiry by summoning people to appear before the Commission to give evidence and/or to produce documents (s 2). The failure of a person to appear as a witness or to produce documents, or to answer questions put to them, is an offence punishable by fine or imprisonment (ss 3 and 6). Witness expenses may be payable to persons summoned to give evidence (s 8).
- It is not a reasonable excuse for a person receiving a summons or notice to produce to refuse to answer questions or provide documents on the ground they are subject to legal professional privilege (s 6AA), unless a reasonable excuse applies (discussed in the next part). A person who seeks to assert a document is subject to legal professional privilege must follow Practice Guideline 2 (discussed in the next part).
- At its first public hearing on 12 February 2018, the Commissioner indicated that it would not be a reasonable excuse for a person receiving a summons to appear or notice to produce to refuse to answer questions or produce documents, on the grounds that answers to questions or the production of documents are subject to a confidentiality regime or a non-disparagement clause in a settlement or employment agreement. However, the Financial Services Royal Commission has the power to make non-publication orders in relation to documents or information contained in documents (s 6D(3)). The Financial Services Royal Commission has established a procedure for applications for non-publication orders (see below).
- A key feature of all Royal Commissions is that the common law privilege against self-incrimination (otherwise applicable in Court proceedings) is not available. Accordingly, a person summoned to answer questions or produce documents to the Financial Services Royal Commission must not refuse to answer a question or produce a document on the grounds that the answer or production might tend to incriminate them, or make them liable to a penalty (unless criminal or penalty proceedings have already been commenced) (s 6A). However, any answers given or documents produced to the Financial Services Royal Commission cannot be used in any ancillary criminal or civil proceedings against the person (s 6DD).
- The Financial Services Royal Commission has the power to apply for search warrants in relation to matters into which it is inquiring (s 4).
- The Financial Services Royal Commission may provide information or evidence obtained during the course of its inquiry to the Attorney-General, DPP, commissioner of a police force or other persons responsible for the administration or enforcement of a relevant law, which it considers may relate to a contravention of a criminal law, or civil or administrative penalty (s 6P). It is an offence for a person or entity to do any of the following in relation to the Financial Services Royal Commission:
- To intentionally give evidence which the person knows is false or misleading (s 6H).
- To bribe or commit fraud on a witness to give false evidence, or to not comply with a notice to produce a document to the Financial Services Royal Commission (ss 6I and 6J).
- To destroy or conceal documents which are required (or likely to be required) for production to the Financial Services Royal Commission. It is also an offence to render them incapable of identification, or to render them illegible or undecipherable (s 6K).
- To intentionally prevent a witness from giving evidence or producing documents to the Financial Services Royal Commission (s 6L), or to use or inflict violence, punishment, damage, loss or disadvantage on a person who gives evidence or produces documents to the Commission (s 6M)
- To dismiss an employee from their employment, or to prejudice them in their employment, because they give evidence or produce a document to the Financial Services Royal Commission (s 6N). This is very important for employers, particularly those in the financial services sector. These offences are punishable by a fine or imprisonment. The maximum penalty for some of the offences is 5 years imprisonment.
First Public Hearing of the Financial Services Royal Commission
The progress of the Financial Services Royal Commission was outlined at the first public hearing of the commission on 12 February 2018. At the hearing, the Commission indicated it had written to a number of entities in the financial services industry inviting each to make an early written submission (not exceeding 50 pages in length) addressing a number of questions. Those questions related directly to the terms of reference. The questions asked by the Commission included, among other questions, whether the relevant entity had identified any misconduct by the entity, or conduct falling short of community expectations, since 1 January 2008, and if yes, asked the entity to set out the nature, extent and effect of the misconduct etc. The invitation for a submission by financial services and industry participants is one example of the Financial Services Royal Commission obtaining information in order to discharge its terms of reference.
Separately, the Commission indicated that it had sought public submissions through an on-line portal in relation to matters the subject of its terms of reference. Senior Counsel Assisting the Royal Commission, Rowena Orr QC, stated that a number of submissions had been received from the public from around Australia and in relation to different matters the subject of the Commission. The Commissioner emphasised the central importance of the public’s participation in the royal commission by making submissions. Critically, the Commissioner indicated that the sequence of action of first asking industry participants to identify misconduct and conduct falling short of community standards and expectations, and then asking the public to make submissions, is that it may help to identify whether there is a gap between what industry participants say is relevant conduct, and what members of the public see as being relevant. The Financial Services Royal Commission also indicated that it will conduct its inquiry by reference to case studies. It will not have the capacity to consider every individual case referred to the Financial Services Royal Commission.
The Commission has announced that further hearings will be scheduled within the next month. It is expected that those hearings will concern the provision of home loans, car loans and credit cards.Further information about future hearings will be made available on the Financial Services Royal Commission website.
Further publications in relation to the conduct of the Financial Services Royal Commission will be published by the Banking & Finance Section of CommBar during the course of 2018.
Part 2 of this post can be viewed here